This  book  is  DUE  o->  the  I"*;!  date  stamped  below 


SOUTHERN  BRANCH; 

UNIVERSITY  OF  CALIFORNU 

LIBRAPY, 


61ST  CONGRESS  ;  :  2d  SESSION 

1909-1910 


SENATE  DOCUMENTS 


Vol,  18 


WASHINGTON  :  :  GOVERNMENT  PRINTING  OFFICE  :  :  1910 


1 1'J  ib 


61st  Congress  |  SENATE  |  ^^^^^^^ 

2d  Session       J  I     No.  492 


NATIONAL  MONETARY  COMMISSION 


The 


English  Banking 
System 


By 

HARTLEY  WITHERS 

Sir  R.  H.  INGLIS  PALGRAVE 

AND  OTHER  WRITERS 


Washington  :   Government  Printing;  Office  :   1910 


NATIONAL  MONETARY  COMMISSION. 


Nelson  W.  Aldrich,  Rhode  Island,  Chairman. 

Edward  B.  Vreeland,  New  York,  V ice-Chairman. 
Julius  C.  Burrows,  Michigan.  John  W.  Weeks,  Massachusetts. 

Eugene  Hale,  Maine.  Robert  W.  Bonynge,  Colorado. 

PHiLANrER  C.  Knox,  Pennsylvania.  Sylvester  C.  Smith,  California. 

Theodore  E.  Burton,  Ohio.  Lemuel  P.  Padgett,  Tennessee. 

Henry  M.  Teller,  Colorado.  George  F.  Burgess,  Texas. 

Hernando  D.  Money,  Mississippi.  Arsene  P.  Pujo,  Louisiana. 

Joseph  W.  Bailey,  Texas.  Arthur  B.  Shelton,  Secretary. 

A.  Piatt  Andrew,  Special  Assistant  to  Commission. 


HG 


W77e 

TABLE  OF  CONTENTS. 


THE  ENGLISH  BANKING  SYSTEM.     By  Hartley  Withers. 

Chapter  I. — The  English  System:  Page. 

(A)  The  Bank  of  England 3 

(B)  The  joint-stock  banks 23 

(C)  The  Scotch  banks 41 

(D)  The  private  banks 50 

(E)  The  merchant  bankers  and  accepting  houses.  53 

(F)  The  postal  and  trustee  savings  banks 58 

(G)  The  discount  houses 61 

II. — Law  and  Custom  in  the  English  System 65 

(A)  The  Bank  of  England 66 

(B)  The  English  joint-stock  banks 78 

(C)  The  private  banks 93 

(D)  The  Scotch  banks 95 

III. — The  Banking    Business   in    England  and   Scot- 
land: 

(A)  English  arrangements 99 

(B)  Scotch  arrangements 105 

(C)  English  banking  associations 106 

(D)  Conclusion 109 

IV. — The  London  Stock  Exchange: 

(A)  The  institution  of  the  jobber iii 

(B)  Constitution  and  membership 120 

(C)  The  government  of  the  exchange 127 

(D)  The  settlement  and  other  details 128 

(E)  The  official  list 132 

THE  HISTORY  OF  THE  SEPARATION  OF  THE  DEPART- 
MENTS OF  THE  BANK  OF  ENGLAND.  By  Sir  R.  H  Inglis 
Palgrave,  F.  R.  S 149 

Chapter  I. — History  op  the  Separation 149 

II. — Separation  op  the  Two  Departments  and  the 

Rate  op  Discount 182 

III. — Correspondence  between  the  Government  and 
the  Bank  of  England  during  the  Crises  op 
1847,  1857,  and  1866 202 

IV. — Extracts  prom  Evidence  and  Reports  of  Com- 
mittees OF  the  House  of  Lords  and  the 
House   of   Commons  on  the   Division   of   the 

Departments 221 

V. — Remarks  on  the  Bank  Act  of  1844  by  the  late 
Dr.  N.  G.  Pierson,  sometime  President  of  the 

Bank  of  the  Netherlands 243 

I 


Natio*nal     Monetary    Commission 

Page. 

ENGLISH  BANKING  ORGANIZATIONS.     By  Ernest  Sykes..      262 

THE   LONDON   BANKERS   CLEARING   HOUSE.     By  Robert 

Martin  Holland 267 

Table  I. — Bills,  checks,  etc.,  paid  at  the  bankers  clearing  house 

in  London,  1899-1908 292 

II. — The  average  daily  clearings,  1868-1908 293 

III. — Statistics  of  the  bankers  clearing  house  from  1 868-1908.-  294 


THE  ENGLISH  BANKING  SYSTEM. 

By  Harti^ey  Withers. 


Chapter  I. 

THE  ENGLISH  SYSTEM. 

(A)  BANK  OF  ENGLAND. 

The  distinctive  functions  of  the  Bank  of  England  consist 
in  its  acting  as — 

1 .  Banker  to  the  British  Government. 

2.  Banker  to  the  joint  stock  and  private  banks. 

3.  (a)  Sole  possessor  of  the  right  to  issue  notes  which 
are  legal  tender  in  England;  (b)  sole  possessor,  among 
joint  stock  banks  with  an  office  in  London,  of  the  right  to 
issue  notes  at  all. 

4.  Provider  of  emergency  currency. 

5.  Keeper  of  the  gold  reserve  for  British  banking. 

6.  Keeper  of  the  gold  reserve  which  is  most  readily 
available  for  the  purposes  of  international  banking. 

These  various  functions  fit  into  and  supplement  one 
another,  and  though  their  diversity  is  sometimes  pointed 
to  as  throwing  too  much  responsibility  onto  one  institu- 
tion, it  in  fact  enables  the  Bank  to  carry  out  its  duties 
with  extraordinary  ease,  and  with  the  least  possible  dis- 
turbance to  the  financial  community.  By  the  fact  that 
it  keeps  the  balances  of  the  other  banks,  the  Bank  of 
England  is  enabled  to  conduct  the  payment  of  the  interest 
on  the  British  debt  largely  by  transfers  in  its  books.  By 
the  fact  that  it  keeps  the  balances  of  the  Government  and 
has  the  monopoly  of  the  legal-tender  note  issue,  the  Bank 
has  a  great  prestige  in  the  eyes  of  the  general  public, 
which  it  communicates  to  the  other  banks  which  bank 


National    Monetary     Commission 

with  it.  There  is  an  impression  that  the  Government  is 
always  behind  the  Bank,  and  that  the  Bank  is  always 
behind  the  other  banks,  and  this  feeling  has  certainly 
done  much  to  foster  the  confidence  of  the  British  public 
in  its  banking  system. 

A  credit  in  the  books  of  the  Bank  of  England  has  come 
to  be  regarded  as  just  as  good  as  so  much  gold;  and  the 
other  banks,  with  one  exception,  habitually  state  their 
"cash  in  hand  and  at  the  Bank  of  England"  as  one  item 
in  their  balance  sheets,  as  if  there  were  no  difference 
between  an  actual  holding  of  gold  or  legal  tender  and  a 
balance  at  the  Bank  of  England.  It  thus  follows  at 
times  when  an  increase  of  currency  is  desirable,  it  can 
be  expanded  by  an  increase  in  the  balances  of  the  other 
banks  at  the  Bank  of  England,  since  they  thus  become 
possessed  of  more  cash  to  be  used  as  the  basis  of  credit. 
For  currency  in  England  chiefly  consists  of  checks,  and 
customers  who  apply  to  the  banks  for  accommodation, 
by  way  of  discount  or  advance,  use  it  by  drawing  a  check 
which  is  passed  on  and  so  creates  a  deposit;  and  expan- 
sion of  currency  thus  consists  chiefly  in  expansion  of 
banking  deposits.  This  expansion  is  only  limited  by 
the  proportion  between  deposits  and  cash  which  the 
banks  think  fit  to  keep,  and  as  long  as  they  can  increase 
their  cash  by  increasing  their  credit  in  the  Bank  of  Eng- 
land's books  the  creation  of  currency  can  proceed  with- 
out let  or  hindrance.  Their  balances  can  be  increased 
by  borrowing  from  the  Bank  of  England,  which  is  gen- 
erally carried  out  not  by  the  banks  themselves  but  by 
their  customers  from  whom  they  have  called  in  loans, 
and  the   Bank  of  England  is  thus  enabled  to  provide 


The    English     Banking     System 

emergency  currency  with  great  ease,  by  means  of  loans 
and  discounts  which  are  used  to  swell  the  balances  of 
the  other  banks,  which  thus  show  an  increase  of  the  cash 
at  the  Bank  of  England  which  they  use  as  a  basis  for 
credit  operations.  The  elasticity  of  the  system  is  thus 
remarkable,  and  the  merchants  and  bill  brokers  of 
London  can  by  taking  approved  security  to  the  Bank  of 
England,  increase  the  basis  of  English  credit  in  a  few 
minutes  by  borrowing. 

I.  Examining  these  functions  of  the  Bank  of  England 
in  closer  detail  we  find  that  its  first  and  most  obvious  one, 
which  originally  brought  it  into  being,  of  financing  the 
British  Government  and  acting  as  its  banker,  is  now  per- 
haps its  least  difficult  and  important  duty.  Apart  from 
the  prestige  which  it  thus  acquires  and  its  close  touch 
with  the  Government  and  the  officials  of  the  Treasury,  the 
Bank's  position  as  government  banker  is  of  little  direct 
material  advantage.  Its  duties  as  such,  besides  the  nor- 
mal relation  between  a  bank  and  a  customer,  consist 
chiefly  in  making  advances  to  the  treasury  in  the  shape 
of  "deficiency  advances"  when  the  government  balances 
are  too  low  to  admit  of  the  payment  of  the  quarterly 
interest  on  the  British  debt  without  replenishment,  or 
against  "ways  and  means"  advances  at  times  when  the 
revenue  is  coming  in  more  slowly  than  government  ex- 
penditure is  proceeding.  It  also,  when  the  Government 
has  to  borrow  to  a  greater  extent,  manages  its  issues  of 
treasury  bills,  or  any  loan  operation  that  the  Government 
may  have  to  undertake,  such  as  the  creation  of  fresh  debt 
in  time  of  war,  or  the  periodical  borrowing  recently  neces- 
sitated by  the  requirements  of  the  Irish   land-purchase 


National    Monetary     Commission 

scheme.  The  variations  in  the  amount  of  the  Govern- 
ment's balance  at  the  Bank  of  England  are  a  question 
of  great  importance  to  the  outside  money  market,  because 
when  this  balance  is  big  the  result  is  that  a  large  amount 
of  money  is  in  the  control  of  the  Bank  of  England,  and 
the  resources  of  the  outer  market  are  thus  curtailed. 

It  has  already  been  shown  that  the  balances  of 
the  other  banks  at  the  Bank  of  England  are  treated 
by  them  as  cash  and  used  as  the  basis  of  credit. 
Consequently  when  the  payment  of  revenue  on  a  large 
scale  transfers  large  amounts  from  the  other  banks  to  the 
government  account  in  the  Bank  of  England's  books,  the 
outer  market's  basis  of  credit  is  thus  reduced  and  money 
tends  to  become  scarce  and  dear.  This  is  especially  notice- 
able in  the  last  quarter  of  the  financial  year,  January  to 
March,  when  the  payment  of  the  direct  taxes  (income  tax, 
and  house  duty)  transfers  many  millions  from  the  tax-pay- 
ing public,  through  its  bankers,  to  the  national  exchequer's 
credit  at  the  Bank.  Between  December  28,  1907,  and 
March  27,  1908,  public  deposits,  or  government  balances,  at 
the  Bank  of  England  rose  from  £5,625,000  to  £19,843,000 
by  the  operation  of  this  process.  This  transfer  makes  a 
gap  in  the  basis  of  credit  which  has  to  be  filled  up  by  bor- 
rowing, and  it  is  usual  to  find  that,  according  to  the  phrase 
current  in  Lombard  street,  "the  market  is  in  the  Bank " — 
that  is,  the  merchants  and  brokers  are  borrowing  from  the 
Bank  of  England  throughout  the  greater  part  of  this  quar- 
ter of  the  year.  When  the  market  is  borrowing  from  the 
Bank  it  does  so  either  by  discounting  bills  with  it  at  Bank 
rate,  which  is  the  official  minimum  rate  of  discount,  or  by 
taking  advances  on  securities,  for  which  advances  it  usu- 

6 


The    English    Banking    System 

ally  pays  one-half  of  i  per  cent  above  Bank  rate;  and  since 
Bank  rate  is,  except  on  quite  rare  occasions,  above  the 
rates  for  loans  and  discount  current  in  the  outside  market, 
it  will  be  seen  that  this  transfer  of  revenue  funds  to  the 
Government's  balance  normally  raises  the  current  value 
of  money  during  the  period  in  which  it  is  proceeding. 

Dealers  in  credit,  who  are  pinched  in  pocket  by  this 
habitual  decrease  in  the  supply  of  money  at  this  season, 
cry  out  against  the  system,  and  maintain  that  the  revenue 
ought  to  be  distributed  among  the  other  banks  until  it  is 
required  for  government  disbursements  at  the  end  of  the 
quarter,  in  the  same  manner  as  the  United  States  Treasury 
deposits,  when  placed  with  the  American  banks,  are 
divided  among  many.  Such  a  change,  however,  would 
obviously  strike  at  the  very  basis  of  the  English  system, 
which  has  grown  up  with  all  its  anomalies  into  a  very 
practical  and  trustworthy  instrument.  If  the  Bank  of 
England  were  deprived  of  its  privilege  of  holding  the 
revenue  as  paid  in,  it  would  have  to  be  remunerated  more 
highly,  not  only  for  the  other  work  that  it  does  for  the 
Government,  but  also  for  performing  other  functions  for 
the  community,  which,  as  will  be  seen  later,  throw  onto 
it  responsibilities  which  hamper  its  earning  power  as  a 
banker.  If  any  alteration  is  necessary  of  an  arrangement 
which  causes  chronic  inconvenience  to  dealers  in  credit 
during  the  greater  part  of  a  quarter  of  the  year,  it  would 
more  naturally  be  found  in  a  reorganization  of  the  system 
under  which  most  of  the  direct  taxes  are  paid  in  one 
quarter.  It  has  already  been  shown  that  the  position 
of  the  Bank  of  England  as  government  bank  gives  it  a 
prestige  in  the  eyes  of  the  public,  which  it  passes  on  to  the 

7 


National    Monetary     Commission 

other  banks  which  are  its  customers;  and  a  banking 
system  is  so  largely  a  psychological  matter  that  the  most 
radical  reformer  would  hesitate  before  making  any  altera- 
tion which  would  tend  to  shake  the  basis  of  this  prestige. 
2.  The  second  of  the  Bank  of  England's  distinctive 
functions — its  acting  as  banker  to  the  rest  of  the  English 
banking  community — is  the  one  which  throws  upon  it  its 
most  serious  responsibilities  and  gives  it  most  of  its  actual 
power  and  ease  in  working.  The  Government  gives  it 
prestige  in  the  eyes  of  the  multitude,  which  considers  that 
governments  are  omnipotent;  the  other  banks  give  it  the 
power  of  providing  emergency  currency  by  making  entries 
in  its  books,  and  so  acting  as  the  easily  efficient  center  of 
a  banking  system  in  which  elasticity  and  the  economy 
of  gold  are  carried  to  a  perfection  which  is  almost  exces- 
sive. Nevertheless,  it  pays  heavily  for  its  apparently 
privileged  position  as  bankers'  bank.  At  first  sight 
it  would  appear  that  these  customers,  keeping  a  regular 
balance  of  twenty-odd  millions,  which  varies  little  and 
on  which  the  Bank  of  England  pays  no  interest,  were  a 
source  of  comfortable  income  and  no  anxiety  to  it.  But 
in  the  first  place  it  is  obvious  that  a  liability  which  is 
regarded  as  cash  by  the  rest  of  the  banking  community 
requires  special  treatment  by  its  custodian,  and  in  prac- 
tice it  is  so  specially  treated  that  the  Bank  of  England 
maintains  a  proportion  of  cash  to  liabilities  which  is  fully 
twice  as  high  as  that  of  the  strictest  of  the  other  banks. 
This  proportion  rarely  is  allowed  to  fall  below  33  per  cent 
and  generally  ranges  between  40  and  50  per  cent,  and  it 
need  not  be  said  that  this  high  level  of  cash  holding  tells 
heavily  on  the  earning  power  of  the  Bank  of  England. 


The    English    Banking    System 

Moreover,  it  is  its  position  as  bankers'  bank  that  exposes 
the  Bank  of  England  to  the  responsibiHty  of  maintaining 
the  gold  reserve  for  English  banking  and  being  prepared 
to  meet,  in  gold,  any  draft  on  London  that  anyone  abroad 
who  has  acquired  or  borrowed  the  right  to  draw  wishes 
to  turn  into  metal  to  be  shipped  to  a  foreign  country. 

The  amount  of  the  bankers'  balances  is  not  separately 
stated,  but  is  wrapped  up  in  the  total  of  the  other  depos- 
its in  the  Bank  of  England's  weekly  return.  It  is  believed 
to  average  about  22  millions  in  these  days,  and  it  is 
often  contended  that  valuable  light  would  be  thrown 
on  the  monetary  position  if  this  item  were  separated 
from  the  balances  of  the  other  customers  of  the  Bank. 
Many  of  the  outer  bankers  are  in  favor  of  this  change, 
but  there  is  a  serious  practical  objection  to  it,  in  that  a 
dangerous  impression  might  be  created  in  the  public 
mind  if  at  any  time  it  were  seen  that  the  Bank's  cash 
reserve  was  below  its  liability  to  its  banking  customers; 
and  the  separate  publication  of  the  bankers'  balances 
might  thus  check  the  readiness  with  which  the  Bank  of 
England  creates  emergency  credit.  Another  suggestion 
that  is  sometimes  made  by  the  many  critics  of  the  exist- 
ing order  of  things  in  English  banking  is  that  the  banks 
should  keep  their  cash  reserves  themselves;  but  this 
very  revolutionary  change  would  deprive  the  system 
of  its  two  great  advantages,  a  centralized  organization 
with  a  center  which  specializes  on  the  duties  involved 
by  acting  as  center,  and  the  extreme  elasticity  with 
which  the  present  arrangements  work.  At  the  same 
time  it  must  be  admitted  that  the  system  by  which  the 
other  banks  treat  their  balances  at  the  Bank  of  England 


National    Monetary     Commission 

as  cash  leads  to  the  existence  of  a  vast  amount  of  "cash " 
in  England  which  on  being  looked  into  is  found  to  con- 
sist of  paper  securities  or  promises  to  pay.  If  we  assume 
that  the  proportion  of  cash  held  by  the  Bank  of  England 
is  50  per  cent  of  its  liabilities — it  does  not  always  stand 
so  high — the  other  50  per  cent  being  represented  by 
securities,  this  at  once  shows  that  only  half  the  bankers' 
balances  are  backed  by  cash.  And  we  shall  see  when 
we  look  into  its  weekly  return  that  its  cash  in  its  bank- 
ing department,  of  which  the  bankers'  balances  are  a 
liability,  consists  largely  of  its  own  notes;  and  its  own 
notes  are  backed,  to  the  extent  of  about  one-third,  by 
securities.  So  that  the  actual  gold  held  against  these 
bankers'  balances  consists  roughly  of  about  two-thirds 
•of  a  half  of  them,  or  one-third  of  their  total.  And  when 
it  is  considered  that  these  bankers'  balances  are  treated 
by  the  bankers  as  equal  to  cash  in  hand  and  are  made 
the  basis  of  credit,  on  which  they  build  liabilities  rang- 
ing from  five  to  ten  or  even  in  extreme  cases  to  fifty 
times  their  extent,  it  becomes  evident  that  the  critics 
who  maintain  that  the  multiplication  of  credit  and  the 
economy  of  gold  are  carried  too  far  in  England  have  a 
solid  foundation  for  their  contention. 

3.  The  Bank  of  England's  monopoly  of  note  issue,  which 
once  gave  it  the  monopoly  of  joint-stock  banking  in  Lon- 
don, is  now  a  matter  of  comparatively  minor  importance, 
owing  to  the  change  in  English  banking  habits  by  which 
the  check  has  ousted  the  bank  note  for  the  purpose  of 
daily  commercial  payments,  and  the  regulations  which 
were  imposed  on  the  note  issue  by  the  bank  act  of  1844. 
Its  monopoly  lay  in  the  provision,  which  was  one  of  its 


The    English     Banking     System 

early  privileges,  that  "it  shall  not  be  lawful  for  any  body 
politic  or  corporate  whatsoever,  or  for  any  other  persons 
whatsoever,  united  or  to  be  united,  in  covenants  or  part- 
nerships exceeding  the  number  of  six  persons,  in  that 
part  of  Great  Britain  called  England,  to  borrow,  owe,  or 
take  up  any  sum  or  sums  of  money  on  their  bills  or  notes 
payable  at  demand."  This  monopoly  was  conferred  on 
the  Bank  in  1706  and  was  maintained  until  1826,  when 
the  implied  monopoly  in  joint-stock  banking  was  re- 
stricted to  a  65-mile  radius  around  L-ondon.  In  1833 
joint-stock  banks  were  established  in  London  itself,  since 
it  had  been  discovered  that  the  Bank  of  England's  alleged 
monopoly  only  reserved  to  it  the  privilege  of  note  issue, 
and  the  private  bankers  in  London  had  already  found 
that  it  was  more  convenient  to  banker  and  customer  to 
work  by  the  system  of  deposit  and  check.  By  this  system 
a  customer  who  took  a  loan  from  his  banker  did  not  carry 
it  away  with  him  in  the  form  of  notes,  but  was  given  a 
deposit  or  credit  in  the  bank's  books  and  the  power  of 
drawing  checks  against  it.  The  development  of  this  sys- 
tem has  made  money  in  England  mean,  as  a  rule,  a  credit 
in  the  books  of  a  bank  which  enables  its  holder  to  draw 
checks,  and  has  made  checks  the  chief  currency  of  the 
country. 

The  development  of  this  system  was  quickened  by  the 
provisions  of  Peel's  Act  of  1844,  which,  under  the  influence 
of  banking  disasters  that  had  arisen  out  of  reckless  note 
issuing  by  private  banking  firms  in  the  counties,  laid  down 
an  iron  rule  for  the  regulation  of  note  issues  in  England. 
None  of  the  other  note  issuers  were  allowed  to  increase 
their  issues  under  any  circumstances,  and  the  Bank  of 


National    Monetary     Commission 

England,  for  every  additional  note  issued  beyond  £14,- 
000,000,  was  to  hold  metal  in  its  vaults.  Under  the  terms 
of  Peel's  Act  one-fifth  of  this  metal  might  be  silver,  and 
in  the  early  returns  issued  by  the  Bank  under  the  act  a 
certain  amount  of  silver  is  found  among  the  assets  of  the 
issue  department.  In  the  firist  return  issued,  for  example, 
which  was  dated  September  7,  1844,  the  total  note  issue 
was  £28,351,000,  which  was  backed  by  £14,000,000  in 
securities,  £12,657,000  in  gold  coin  and  bullion  and 
£1,694,000  in  silver.  But  since  1853,  no  silver  has  been 
held  in  the  issue  department  of  the  Bank,  and  in  1897, 
when  the  influence  of  the  bimetallists  on  the  existing 
Government  led  to  a  proposal  that  the  proportion  of  sil- 
ver allowed  by  law  should  be  held  by  the  Bank  as  back- 
ing for  its  note  issue,  public  opinion  expressed  itself  so 
vigorously  that  the  suggestion  was  promptly  buried. 
The  Bank's  fiduciary  note  issue,  thus  fixed  at  £14,000,000, 
was  only  allowed  to  increase  by  the  lapse  of  the  issues  of 
the  existing  issuers,  the  Bank  being  empowered  to 
increase  it  by  two-thirds  of  the  amount  lapsed.  The 
lapsing  process  has  proceeded  steadily  by  the  amalgama- 
tion of  country  banks  with  banks  which  have  London 
offices  and  so  are  prohibited  by  the  Bank's  monopoly. 
And  the  Bank's  fiduciary  issue  has  thus  been  raised 
from  the  original  £14,000,000  to  £18,450,000.  Above 
this  line  it  can  not  go  except  by  means  of  the  sus- 
pension of  the  bank  act,  which  has  been  found  neces- 
sary occasionally  in  times  of  panic,  the  last  of  such 
occasions  having  occurred  in  1866.  The  English  currency 
system  is  thus,  as  far  as  the  law  can  rule  it,  entirely  inelas- 
tic, but  it  has  already  been  shown  that  even  when  the 


The    English    Banking     System 

law  of  1844  was  passed,  the  check  currency,  over  which  the 
law  exercises  no  restriction,  was  aheady  driving  out  the 
note,  and  banks  without  any  right  of  note  issue  had  been  1 1 
years  estabHshed  in  London.  The  Bank  of  England's  note 
issue  is  now  chiefly  used  by  other  banks  as  "till  money," 
or  part  of  the  store  of  legal-tender  cash  they  keep  to  meet 
demands  on  them.  It  has  thus  become  part  of  the  basis 
of  credit  in  England,  since  the  other  banks  roughly  base 
their  operations  on  their  holding  of  cash  in  hand  and  at 
the  Bank  of  England.  Their  cash  at  the  Bank  of  Eng- 
land has  already  been  discussed  above;  their  cash  in 
hand  consists  of  coin  and  notes,  and  since  the  latter  have 
thus  become  part  of  the  foundation  on  which  the  deposit 
liabilities  of  the  other  banks  are  based,  there  is  reasonable 
ground  for  the  contention  often  put  forward  by  practical 
expert  critics  of  the  English  system,  that  the  fiduciary 
note  issue  should  be  reduced  by  the  repayment  by  the 
Government  of  the  whole  or  part  of  a  Government  debt 
of  £11,000,000  to  the  Bank,  which  backs  the  greater  part 
of  it,  and  its  replacement  by  gold.  It  is  evident  that  the 
amount  of  metallic  backing  for  a  note  issue  which  is 
intended  to  circulate  as  currency  is  a  different  matter 
from  that  required  in  the  case  of  a  note  issue  which  is  held 
by  bankers  as  a  reserve  and  used  by  them  as  a  founda- 
tion for  a  pyramid  of  credit  operations. 

4.  By  the  ease  with  which  the  Bank  of  England  pro- 
vides emergency  currency  it  gives  the  English  banking 
system  the  great  advantage  of  extreme  elasticity  and 
adaptability ;  and  it  is  enabled  to  do  this  by  the  fact  that 
it  acts  as  banker  to  the  other  banks,  and  that  every  credit 
which  they  have  in  its  books  is  regarded  by  them  and  by 

13 


National     Monetary     Commission 

• 
the  rest  of  the  community  as  "cash"  to  be  taken  as  prac- 
tically equal  to  so  much  gold.  This  cash  at  the  Bank  of 
England  in  the  hands  of  the  rest  of  the  bankers  can  be 
multiplied  as  rapidly  as  the  Bank  of  England  is  prepared 
to  make  advances,  and  as  the  mercantile  and  financial 
community  can  bring  it  bills  for  discount  or  securities  to 
be  borrowed  on.  There  is  no  legal  restriction  of  any  sort 
or  kind,  and  the  close  relations  between  the  Bank  and  its 
borrowing  customers  enable  the  necessary  operations  to 
be  carried  through  with  a  celerity  which  is  unrivaled,  at 
any  rate  in  the  Eastern  Hemisphere.  The  process  works 
as  follows :  In  every  English  bank  balance  sheet  there  will 
be  found  an  item  among  the  assets  "cash  at  call  or  short 
notice,"  though  in  a  few  cases  the  slovenly  habit  is  adopted 
of  including  this  entry  along  with  the  cash  in  hand.  This 
"cash,"  as  it  is  called,  really  consists  chiefly  of  loans  made 
by  the  banks  to  the  discount  houses,  and  regarded  by  the 
banks  as  the  most  liquid  of  their  resources.  As  such,  it 
is  at  once  made  use  of  when  for  any  reason,  such  as  the 
many  payments  which  have  to  be  made  on  quarter  days, 
or  the  end  of  the  half  year  when  the  preparation  of  balance 
sheets  by  firms  and  companies  requires  an  abnormal 
amount  of  cash  for  more  or  less  ornamental  purposes,  the 
banks  are  subjected  to  extra  pressure  by  their  customers, 
who  both  withdraw  actual  currency  from  them  for  smaller 
payments,  and  require  advances  in  order  to  show  cash 
with  bankers  in  their  balance  sheets. 

The  banks  in  order  to  meet  this  pressure,  and  at  the 
same  time  to  preserve  an  adequate  amount  of  cash  in 
their  own  statements,  call  in  their  loans  from  the  discount 
houses;  the  discount  houses,  at  a  point,  can  only  repay 

14 


The    English     Banking     System 

them  by  borrowing  from  the  Bank  of  England  and  trans- 
ferring the  credit  raised  with  it  to  the  bankers,  whose  cash 
at  the  Bank  of  England  is  thus  increased.  This  book 
entry  takes  the  place  in  their  balance  sheets  of  the  legal- 
tender  cash  that  their  customers  have  withdrawn,  and  is 
used  as  the  basis  for  the  increased  deposits  that  have  been 
created  by  the  loans  of  the  bankers  to  their  customers  for 
ornamental  purposes.  Similarly  at  the  time  of  year  when 
the  transfer  of  the  taxes  to  the  Government's  balance 
reduces  the  cash  at  the  Bank  of  England  held  by  the  other 
banks  the  gap  is  filled  by  the  loans  made  by  the  Bank  of 
England  to  the  customers  of  the  other  banks.  In  short, 
by  discounting  and  making  advances  the  Bank  of  Eng- 
land can  at  any  time  create  book  credits,  which  are  regarded 
as  cash  by  the  English  banking  community,  and  on  which 
the  latter  can  base  the  credits  which  give  the  right  to 
draw  checks,  which  are  the  most  important  part  of  the 
English  currency.  The  extent  to  which  the  Bank  of 
England  can  create  this  credit  is  a  matter  for  its  own 
discretion,  but  any  creation  of  it  diminishes  the  propor- 
tion that  it  shows  in  its  own  weekly  returns  between  its 
reserve  and  liabilities.  Consequently  when  it  is  applied 
to  for  amounts  which  bring  that  proportion  too  low  the 
Bank  of  England  has  to  take  steps  to  reinforce  its  cash 
reserve. 

5.  It  has  been  shown  that  the  Bank  of  England  keeps 
the  balances  of  the  other  banks,  and  from  this  it  follows 
that  the  latter  look  to  it  for  gold  or  notes  at  times  when 
the  local  commercial  community  requires  an  extra  supply. 
At  the  end  of  every  month,  especially  at  the  ends  of  the 
quarters  or  at  times  of  national  holidays,  the  Bank's  note 

76651—10 2  15 


National    Monetary     Commission 

circulation  expands  and  coin  is  taken  from  it.  The  duty- 
is  thus  thrown  upon  it  of  keeping  an  adequate  supply  of 
cash  for  home*  purposes,  and,  as  has  been  already  stated, 
its  normal  proportion  of  cash  to  liabilities  is  very  much 
higher  than  that  of  the  other  banks.  But  these  move- 
ments are  tidal  and  regular,  and  hough  times  of  active 
trade  increase  slightly  the  demand  for  coin  and  note  cur- 
rency in  England,  the  extensive  and  ever-growing  use  of 
the  check  reduces  the  importance  of  this  part  of  the 
Bank's  duties. 

6.  Much  more  important  is  the  Bank  of  England's  duty 
as  custodian  of  the  gold  store  for  international  banking. 
London  is  the  only  European  center  which  is  always  pre- 
pared to  honor  its  drafts  in  gold  immediately  and  to  any 
extent.  The  Bank  of  France  has  the  right  to  make  pay- 
ments in  silver,  and  uses  it  by  often  charging  a  premium 
on  gold,  sufficient  to  check  any  demand  for  it;  and  in 
other  centers  measures  are  taken  which  make  apparently 
free  convertibility  of  credit  instruments  optional  at  the 
choice  of  the  central  bank.  Consequently  the  Bank  of 
England  has  to  be  prepared  to  meet  demands  on  it  at  any 
time  from  abroad,  based  on  credits  given  to  foreigners 
by  the  English  banking  community,  and  it  has  thus  to 
observe  the  signs  of  financial  weather  in  all  parts  of  the 
world  and  to  regulate  the  price  of  money  in  London  so 
that  the  exchanges  may  not  be  allowed  to  become  or 
remain  adverse  to  a  dangerous  point.  The  difficulties  of 
this  task  are  increased  by  the  extent  to  which  the  English 
banking  community  works  independently  of  it,  by  ac- 
cepting and  discounting  finance  paper,  and  giving  for- 
eigners credits   at  rates  which   encourage  their  further 

i6 


The    English     Banking     System 

creation.  For  the  low  and  wholly  unregulated  proportion 
of  cash  to  liabilities  on  which  English  banking  works, 
enables  the  other  banks  to  multiply  credits  ultimately 
based  on  the  Bank  of  England's  reserve,  leaving  the  re- 
sponsibility for  maintaining  the  reserve  to  the  Bank.  This 
it  does  by  raising  its  rate  when  necessary,  and  so,  if  it  has 
control  of  the  market  and  its  rate  is  "  effective  " — a  phrase 
which  will  be  explained  later — raising  the  general  level  of 
money  rates  in  London. 

When  its  rate  is  not  effective,  the  Bank  of  England  finds 
itself  obliged  to  intervene  in  the  outer  money  market — 
consisting  of  the  other  banks  and  their  customers — and 
control  the  rates  current  in  it.  This  it  does  by  borrowing 
some  of  the  floating  funds  in  this  market,  so  lessening 
their  supply  and  forcing  up  the  price  of  money.  By 
means  of  this  borrowing  it  diminishes  the  balances  kept 
with  it  by  the  other  banks,  either  directly. or  indirectly — 
directly  if  it  borrows  from  them,  indirectly  if  it  borrows 
from  their  customers  who  hand  the  advance  to  it  in  the 
shape  of  a  check  on  them.  The  result  is  that  so  much 
of  the  "cash  at  the  Bank  of  England,"  which  the  English 
banking  community  uses  as  part  of  its  basis  of  credit,  is 
wiped  out,  money — which  in  London  generally  means 
the  price  at  which  the  bankers  are  prepared  to  lend  for  a 
day  or  for  a  short  period  to  the  discount  houses — becomes 
dearer,  the  market  rate  of  discount  consequently  tends  to 
advance,  the  foreign  exchanges  move  in  favor  of  London, 
and  the  tide  of  gold  sets  in  the  direction  of  the  Bank  of 
England's  vaults,  and  it  is  enabled  to  replenish  its  reserve 
or  check  the  drain  on  it.  That  the  Bank  of  England  should 
have  to  go  through  this  clumsy  ceremony  of  borrowing 

17 


National     M on  et ar y     Commission 

money  that  it  does  not  want,  in  order  to  deprive  the  outer 
market  of  a  surplus  which  depresses  discount  rates  in  a 
manner  that  is  dangerous  owing  to  its  ejffect  on  the  foreign 
exchanges,  arises  from  the  want  of  connection  between 
bank  rate  and  market  rate.  In  former  days  the  London 
money  market  never  had  enough  money  to  work  with 
without  help  from  the  Bank  of  England.  Bagehot,  in  his 
great  work  on  Lombard  street,  published  in  1873,  says 
that  ' '  at  all  ordinary  moments  there  is  not  money  enough 
in  Lombard  street  to  discount  all  the  bills  in  Lombard 
street  without  taking  some  money  from  the  Bank  of 
England." 

As  long  as  this  was  so,  Bank  rate — the  price  at  which 
the  bank  would  discount  bills — was  at  all  times  an  import- 
ant influence  on  the  market  rate.  Since  then,  however, 
the  business  of  credit  making  has  been  so  quickly  and  skill- 
fully extended  that  Lombard  street  is  frequently  able  to 
ignore  Bank  rate,  knowing  that  it  will  easily  be  able  to 
supply  its  needs  from  the  other  banks,  at  rates  which  are 
normally  below  it.  Currency  in  England  consists  of 
checks  drawn  against  deposits  which  are  largely  created 
by  the  loans  and  discounts  of  the  other  banks.  There  is  no 
legal  limit  whatever  on  the  extent  to  which  these  loans 
and  discounts  can  be  multiplied,  and  the  only  limits  im- 
posed are  those  of  publicity,  which  is  applied  rarely  in  all 
cases  and  in  some  not  at  all,  and  of  the  prudence  with 
which  the  banks  conduct  their  business.  Hence  it  follows 
that  competition  between  the  banks  often  impels  them  to 
continue  to  make  advances  or  discount  bills  at  low  rates 
when  the  Bank  of  England,  as  custodian  of  the  English 
gold  reserve,  thinks  it  advisable  in  the  interests  of  the 


The    English     Banking     System 

foreign  exchanges  to  impose  a  higher  level.  This  it  does 
by  borrowing  some  of  the  credit  manufactured  by  the  other 
banks,  in  order  to  create  artificial  scarcity  of  money,  and 
make  its  own  official  rate  effective. 

It  thus  appears  that  the  Bank  of  England's  official  rate 
is  often  through  long  periods  a  mere  empty  symbol,  bear- 
ing no  actual  relation  to  the  real  price  of  money  in  Lon- 
don; and  only  becomes  effective,  and  a  factor  in  the 
monetary  position  ( i )  when  the  trade  demand  for  credit 
is  keen  enough  to  tax  the  credit-making  facilities  of 
the  other  banks  to  their  full  extent,  (2)  when  the  pay- 
ment of  taxes  transfers  large  sums  from  the  other 
banks  to  the  Government's  account  at  the  Bank  of 
England,  so  reducing  the  "cash  at  the  Bank"  on  which 
they  build  credit  operations,  and  (3)  when,  owing  to 
foreign  demands  for  gold,  the  Bank  of  England  takes 
measures,  by  borrowing,  to  restrict  credits  in  the  open 
market  and  to  make  its  rate  effective.  In  other  re- 
spects its  official  rate  differs  materially  from  the  rates 
quoted  by  ordinary  dealers  in  credit.  It  does  not  fluctu- 
ate according  to  the  supply  and  demand  for  bills,  but  is 
regularly  fixed  once  a  week  at  the  meetings  of  the  Bank  of 
England  court  on  Thursday  morning.  It  is  extremely 
rare  for  any  change  to  be  made  in  the  Bank  of  England 
rate  on  any  day  except  Thursday.  Instances  occur  rarely 
when  some  sudden  change  of  position  makes  it  essential, 
as  at  the  end  of  1906,  when  the  Bank  rate  was  raised  to 
6  per  cent  on  a  Friday  morning.  In  normal  times  the  rate 
which  is  fixed  on  one  Thursday  "is  maintained  until  the 
next,  though  the  rate  is  only  a  minimum  and  the  Bank  of 
England  occasionally  takes  advantage  of  this  fact  and 

19 


National     Monetary     Commission 

refuses  to  discount  at  its  minimum,  which  still  remains 
ostensibly  the  Bank  rate,  while  the  bank  actually  makes 
a  rather  higher  charge,  which  is  usually  made  the  official 
rate  on  the  next  Thursday. 

But  it  must  not  be  supposed  that  when  Bank  rate  is 
ineffective  the  Bank  of  England  is  doing  no  business. 
It  discounts  bills  and  makes  advances  at  market  rates  at 
its  branches,  and  also  at  its  head  office  to  its  private  cus- 
tomers. Bank  rate  may  be  described  as  the  price  at 
which  the  Bank  is  prepared  to  discount  in  its  official 
capacity  as  center  of  the  London  market,  and  it  is  be- 
cause appeal  is  only  made  in  exceptional  circumstances 
to  the  Bank  to  provide  credit  in  this  capacity  that  Bank 
rate  is  often  ineffective. 

Finally,  the  position  of  the  Bank  of  England,  and  its 
relation  to  the  English  money  market,  as  a  local  and 
insular  affair,  may  be  summed  up  by  saying  that  the 
Bank,  by  means  of  the  prestige  which  makes  a  credit  in 
its  books  as  good  as  gold  enables  the  banking  community 
to  expand  credits  and  make  check  currency  as  long  as  it 
is  prepared  to  lend  credit.  And  the  extent  to  which  it  is 
prepared  to  lend  credit  is  only  regulated  by  its  own  dis- 
cretion and  consideration  for  the  proportion  between  its 
cash  and  liabilities.  At  the  end  of  the  half  year  it  is 
sometimes  applied  to  for  fresh  credits  to  the  extent  of 
over  twenty  millions  sterling,  chiefly  in  the  form  of 
advances  for  a  few  days.  On  one  side  of  its  account  its 
holding  of  securities  is  expanded  by  this  amount  and  on 
the  other  its  liability  on  deposits  is  similarly  swollen. 
At  the  end  of  1902,  the  last  occasion  when  the  Bank's 
weekly  return  was  made   up   on   December   31,  and   so 


The    English     Banking    System 

showed  the  full  extent  of  the  extra  credit  provided  by  it 
at  the  end  of  the  year,  the  other  securities^'  rose  from 
£27,647,000  on  December  17  to  £47,736,000  on  December 
31.  The  other  deposits*  at  the  same  time  rose  from 
£36,653,000  to  £55,259,000,  and  this  increase  in  the 
basis  of  credit  was  perhaps  used  by  the  other  banks  for 
the  provision  of  five  to  ten  times  as  much  accommodation 
for  their  customers.  A  week  later  the  other  securities 
had  declined  to  £29,625,000  and  the  other  deposits  to 
£41,073,000,  though  reinforced  in  the  meantime  by  the 
payment  of  government  dividends;  the  emergency  credit 
had  been  wiped  out,  when  no  longer  required,  by  the 
simple  process  of  repayment  to  the  Bank  of  England  of 
the  sums  borrowed  from  it;  and  the  Bank's  proportion  of 
cash  to  liabilities,  which  had  fallen  to  28  per  cent  on 
December  31,  had  risen  to  38  ^/^  per  cent. 

Money  in  England  is  thus  to  a  great  extent  a  conven- 
tion based  on  the  assumption  by  the  community  that  a 
credit  in  the  Bank  of  England's  books  is  as  good  as  gold. 
This  assumption  the  Bank  cultivates  by  means  of  the  high 
proportion  of  cash  that  it  keeps  in  normal  times.  At  the 
end  of  the  year  it  allows  it,  as  has  been  shown,  to  run  down 
rapidly,  knowing  that  the  demand  on  it  at  that  period  is 
short  lived  and  is  chiefly  on  account  of  borrowers  who 
will  leave  the  sums  borrowed  to  their  credit  in  its  books; 
but  at  other  times  its  cash  proportion  is  carefully  controlled 
by  movements  in  its  official  rate  and  the  measures  de- 
scribed above. 

oQther  securities  in  the  Bank  of  England's  return,  which  is  explained  in 
detail  later,  are  securities  other  than  British  Government  obligations. 
b  Other  deposits  are  deposits  other  than  those  of  the  British  Government. 


National    Monetary     C  ommis  s  to 


n 


The  problem  of  providing  emergency  credit  and  cur- 
rency capable  of  easy  expansion  and  rapid  contraction  is 
thus  solved  by  means  of  this  convention,  backed  by  the 
use  of  the  check  currency  which  cancels  itself  day  by  day, 
each  check  existing  only  for  the  purpose  of  the  transac- 
tion which  it  completes. 

At  the  same  time  the  Bank  of  England  is  obliged  by  the 
pressure  of  external  conditions  frequently  to  regulate  the 
price  of  money  in  London.  This  necessity  for  regulation 
is  a  fact  which  is  only  dimly  grasped  by  the  London  money 
market  as  a  whole,  which  frequently  resents  the  opera- 
tions of  the  Bank  of  England  and  contends  that  the  price 
of  money  ought  to  be  left  to  the  natural  laws  of  supply 
and  demand.  The  position  of  the  London  money  market, 
however,  as  the  only  one  in  which  gold  can  at  all  times  be 
obtained,  to  any  extent  and  without  question,  clearly 
makes  some  regulation  of  the  rates  at  which  it  is  prepared 
to  work  inevitable.  None  of  the  various  items  which  com- 
pose the  market  can  be  expected  to  conduct  their  business 
with  a  view  to  the  necessities  of  the  market  as  a  whole.  If 
a  banker  wants  to  increase  his  holding  of  bills,  he  naturally 
does  so  at  the  market  rate,  without  considering  whether 
his  doing  so  is  likely  to  turn  the  foreign  exchanges  against 
London  and  so  cause  a  demand  on  London  for  gold.  Con- 
sequently the  exigencies  of  their  daily  business,  and  the 
strong  competition  between  them,  impel  the  banks  and 
discount  houses  to  do  business  at  rates  which  may  some- 
times be  dangerous  to  the  general  interest,  and  it  is  thus 
clearly  necessary  that  some  institution  with  a  command- 
ing position  at  the  head  of  the  machine  should  occasionally 
intervene  and  regulate  its  operations. 


The    English    Banking    System 

(B)  THE  JOINT  STOCK  BANKS. 

The  most  obvious  function  of  the  joint  stock  banks  of 
England  is  the  business  of  taking  care  of  money  for  cus- 
tomers and  meeting  checks  drawn  against  their  balances. 
Customers  place  money  with  them  either  on  current  or 
deposit  account.  On  current  account  it  can  be  withdrawn 
at  any  time  and  earns,  as  a  rule,  no  interest.  Many  banks 
make  it  a  condition  that  unless  the  current  account  is 

maintained  at  a  certain  figure,  generally  £ioo,  a  charge 

• 

shall  be  made  for  keeping  it.     A  usual  charge  is  £  i  5s.  od. 

each  half  year,  but  arrangements  vary  according  to  the 

terms   agreed   with   different   customers,   and    the   keen 

competition  now  prevalent   enables  many  to  obtain  the 

convenience  of  a  bank  account  for  nothing.     Sums  left  on 

deposit  are  generally  placed  for  a  week  or  longer,  and  if 

placed  for  a  week  the  rate  paid  on  them  by  the  banks  is 

generally  i|  per  cent  below  Bank  rate. 

Out    of   this    function    of   meeting   checks    drawn   by 

customers   against   the   sums   deposited   has   grown   the 

banker's  chief  duty,  which  is  now  the  provision  of  check 

currency   for   the   mercantile   and   financial   community. 

Currency  in  England  consists  of  coins,  notes,  and  checks. 

The  coins  are  minted  by  the  Government,  gold  coin  being 

legal  tender  to  any  extent,  silver  to  the  extent  of  £2, 

copper  to  the  extent  of  Is.     The  silver  and  copper  coins 

are  mere  tokens,  passing  at  a  conventional  value  which  is 

far  above  that  of  the  metal  contained  in  them.     The  use  of 

this  metallic  currency  is  almost  entirely  confined  to  small 

retail  transactions,   especially  among  the  poorer  classes 

which  can  not  afford  the  luxury  of  a  banking  account. 


National    Monetary     Commission 

The  note  issues  are  almost  obsolete  as  currency,  the  Bank 
of  England's  being  used  chiefly  as  reserve  by  the  other 
banks,  while  the  issues  of  the  country  banks  are  so  small 
as  to  be  negligible.  '  Most  of  the  commercial  and  financial 
transactions  of  England  to-day  are  settled  by  checks 
drawn  on  the  banks  by  their  customers.  These  checks 
are  not  legal  tender,  since  it  would  obviously  be  impossible 
that  a  check  drawn  by  an  individual  on  a  bank  could 
be  legally  made  acceptable  by  a  creditor  whether  he  wished 
to  take  it  or  not. 

Nevertheless,  the  protection  which  the  check  affords 
to  its  users  against  fraud  has  been  sufficient  to  make  its 
use  general.  And  the  English  community  thus  conducts 
exchanges  between  itself  by  means  of  an  enormous  num- 
ber of  pieces  of  paper  drawn  upon  banks  which  purport 
to  give  the  holder  the  right  to  dem.and  gold  or  legal  tender, 
but  are,  as  a  matter  of  fact,  in  an  overwhelming  propor- 
tion crossed  off  against  one  another  in  the  bankers' 
clearing  houses.  This  check  currency  is  provided  by  the 
banks  without  any  legal  restriction  or  supervision.  It 
has  been,  ever  since  the  beginning  of  banking,  the  busi- 
ness of  the  banker  to  finance  trade  and  commerce  by 
lending  it  what  is  called  money.  Before  printed  instru- 
ments were  known,  bankers,  who  were  in  those  days  gold- 
smiths and  bullion  dealers,  lent  actual  coin  to  their  cus- 
tomers. When  bank  notes  were  invented,  the  bankers 
lent  their  own  promises  to  pay,  which  were  circulated 
among  the  community  and  took  the  place  of  coin  currency. 
When  the  use  of  checks  drove  out  the  bank  note,  as  hap- 
pened in  England,  the  bankers  lent  their  customers  not 
their  own  promises  to  pay  but  the  right  to  draw  checks, 


The    English     Banking     System 

involving  a  promise  on  their  part  to  meet  the  checks  on 
demand.  These  checks  drawn  are  paid  in  to  the  other 
banks,  and  the  check  currency  of  England  thus  consists  to 
a  great  extent  of  certificates  of  mutual  indebtedness  be- 
tween the  banks  and  their  customers.  The  loans  and 
discounts  made  by  one  bank  create  the  deposits  of  another, 
and  the  check  currency  represents  transfers  of  the  credit 
so  created.  If  the  balance  sheet  of  an  English  bank  is 
examined,  it  will  be  found  that  its  liabilities  consist  to  a 
small  extent  of  its  capital  and  reserve  fund,  to  a  very 
large  extent  of  its  current  and  deposit  accounts,  which  are 
its  liabilities  to  its  customers,  and  again  to  a  small  extent 
of  acceptances. 

On  the  assets  side  will  be  found  "cash  in  hand  and  at 
the  Bank  of  England,"  which  represents  the  till  money  and 
cash  reserve — the  coin  and  legal  tender  actually  held  by  the 
bank — and  its  credit  at  the  Bank  of  England.  The  next 
item  is  generally  cash  at  call  and  short  notice,  which  con- 
sists chiefly  of  the  bank's  loans  to  discount  houses  and  also 
in  some  cases  of  advances  to  stockbrokers  and  others 
from  whom  it  may  expect  to  be  easily  able  to  call  them 
in.  Its  investments  will  be  a  fairly  considerable  item, 
but  in  most  cases  a  large  proportion  of  assets  will  con- 
sist of  discounts,  loans,  and  advances.  By  making  these 
discounts,  loans,  and  advances  the  banks  create  deposits 
for  themselves  and  for  one  another.  A  customer  who 
has  raised  a  credit  by  a  discount  or  advance  makes  use 
of  this  credit  to  draw  a  check.  He  passes  the  check  to 
his  creditor,  his  creditor  pays  it  in  to  his  own  bank, 
and  as  long  as  the  discount  or  advance  is  current  there 
will  be  a  deposit  against  it  in  the  books  of  one  bank  or 

25 


National     Monetary     Commission 

another.  In  the  rare  cases  in  which  the  customer  uses 
his  credit  for  the  withdrawal  of  coin  or  notes,  the  same 
process  will  work;  he  will  pass  them  on  to  a  creditor 
who  will  ultimately  pay  them  into  a  bank,  in  the  enor- 
mous majority  of  cases.  The  extent  to  which  the  banks 
can  create  credit  by  means  of  loans  and  discounts  is 
regulated  only  by  their  prudence  and  by  the  rules  which 
they  apply  to  their  business.  If  they  advance  too  much, 
their  credit  at  the  Bank  of  England  will  be  diminished, 
owing  to  the  fact  that  the  claims  against  them  in  the 
clearing  house  will  be  heavier  than  the  claims  which  they 
have  to  present  against  other  banks.  The  result  will  be 
that  the  proportion  of  their  cash  and  liabilities  will  be 
brought  down  to  a  point  which  is  lower  than  they  con- 
sider prudent. 

There  is  no  legal  obligation  of  an}^  sort  on  them  to  main- 
tain any  regular  proportion  between  cash  and  liabilities, 
and  as  their  position  in  this  respect  is  only  subjected  to 
occasional  publicity  they  are  not  obliged  to  consider  even 
the  effect  upon  their  customers  of  any  considerable  varia- 
tion in  the  proportion  between  cash  and  liabilities  which 
they  keep.  The  system  thus  works  with  extreme  elas- 
ticity and  banking  facilities  can  be  provided  in  England 
with  extraordinary  ease.  It  has  of  late  years  been  fre- 
quently contended  that  the  ease  and  elasticity  with  which 
it  works  have  carried  the  English  banking  machinery  to 
a  somewhat  extreme  length  in  the  matter  of  the  economy 
of  gold  and  legal  tenders  and  the  extent  of  the  credit 
pyramid  which  it  builds  up  on  them.  After  the  crisis  of 
1890  Lord  Goschen  seems  to  have  been  strongly  imbued 
with  the  conviction  that  the  system  had  been  carried  too 

26 


The    English     Banking     System 

far.  He  therefore  urged  upon  the  London  banks  that 
they  should  make  a  monthly  statement  of  their  position, 
and  this  suggestion  was  adopted  by  the  majority  of  them. 
The  result  was  that  they  published  a  monthly  statement 
showing  how  they  stood  on  one  day  at  the  end  of  each 
month,  and  it  thus  followed  that  on  one  day  at  the  end 
of  each  month  the  banks  showed  a  proportion  of  cash 
to  liabilities  which  they  considered  sufficiently  adequate 
to  stand  the  light  of  publicity.  But  the  system  has  long 
been  seen  to  be  faulty,  and  a  certain  amount  of  abuse  has 
grown  up  round  it.  It  is  strongly  suspected,  for  example, 
that  some  of  the  banks  which  publish  these  statements 
make  preparations  for  them  by  calling  in  loans  or  reducing 
their  discounts  for  the  day  on  which  the  statements  are 
drawn  up.  As  far  as  this  is  done  the  statement  is  to  a 
certain  extent  misleading,  and  this  practice  of  "window 
dressing,"  as  it  is  called  in  Lombard  street,  has  been 
subject  to  frequent  criticism,  so  much  so  that  one  of  the 
leading  London  banks — the  London  and  County — adopted 
early  in  1908  the  practice  of  showing  its  daily  average 
cash  holding,  thus  demonstrating  that  it  was  not  in  the 
habit  of  preparing  a  statement  which  did  not  represent 
its  position  fairly  throughout  the  month.  So  far  the 
other  banks  have  not  followed  its  example,  and  it  is  very 
reasonably  contended  on  their  part  that  the  monthly 
publicity  to  which  they  are  subjected  is  an  unfair  handi- 
cap to  them  in  the  conduct  of  their  business,  seeing  that 
they  have  to  compete  with  other  banks  which  do  not  make 
any  such  statement,  and  only  show  their  position  at  the 
end  of  each  half  year  when  they  draw  up  their  half-yearly 
balance  sheets.     Lord  Goschen's  reform  was  a  good  one 

27 


National     Monetary     Commission 

as  far  as  it  went,  but  it  was  not  adopted  by  all  the  London 
banks.  None  of  the  private  banks  thought  that  it  applied 
in  any  way  to  them,  and  a  large  agglomeration  of  private 
banks,  which  has  since  then  been  united  as  a  great  joint 
stock  bank,  has  not  adopted  the  policy  of  a  monthly 
statement.  None  of  the  country  banks  have  joined  the 
movement,  and  the  application  of  publicity  is  thus  partial 
and  in  some  respects  unfair. 

It  has  been  contended  that  before  those  banks  which 
publish  monthly  statements  can  be  expected  to  make 
them  fuller  or  more  fairly  representative  of  their  average 
position  throughout  the  month  the  system  should  be 
applied  more  generally  to  the  banking  community  as  a 
whole,  and  especially  that  the  country  banks,  which  com- 
pete keenly  in  the  large  provincial  centers  with  the  branches 
of  the  London  banks,  should  have  the  same  extent  of  pub- 
licity applied  to  them  as  to  their  brethren  who  have  head 
offices  in  London.  It  is  extremely  difficult,  however,  for 
those  in  favor  of  this  reform  to  induce  the  country  bankers 
to  come  into  line  in  the  matter,  and  since  if  they  did  so 
the  extent  of  their  credit  operations  would  probably  be 
considerably  reduced,  the  mercantile  community,  which 
naturally  resents  any  measure  which  would  tend  to  restrict 
the  supply  of  credit  and  possibly  make  it  dearer,  has  not 
hitherto  shown  much  enthusiasm  for  the  reform.  It  has, 
however,  been  advocated  by  a  committee  of  the  Associated 
Chambers  of  Commerce  of  the  United  Kingdom  that  all 
the  banks  should  publish  monthly  statements  showing 
their  average  holding  of  cash,  deposits,  and  other  details. 
Certainly  the  operations  of  these  smaller  banks  and  the 
extent  to  which  they  raise  a  pyramid  of  credit  on  a  small 

28 


The    English     Banking     System 

cash  basis  is  an  element  of  some  danger  to  the  whole 
English  banking  commimity  if  at  any  time  banking  trouble 
should  arise  in  England.  It  has  been  stated  by  a  presi- 
dent of  the  English  Bankers'  Institute  that  the  proportion 
of  cash  to  liabilities  shown  by  country  banks  ranges  down 
to  a  point  as  low  as  2.2  per  cent.  No  one  can  contend 
that  this  is  an  adequate  cash  basis  for  banking  to  work  on, 
and  as  long  as  certain  members  of  the  banking  contmunity 
conduct  their  business  on  these  lines  an  obvious  hardship 
is  involved  on  those  which  keep  a  more  prudent  and  strong 
reserve  of  cash.  It  is  contended  by  the  big  strong  banks 
that  their  smaller  brethren  compete  with  them  by  provid- 
ing more  credit  than  they  have  any  right  to  create,  relying 
on  their  assistance  in  times  of  difficulty. 

The  position  is  an  extremely  delicate  and  difficult  one; 
the  banking  community  as  a  whole  resents  any  suggestion 
of  interference  by  the  Government,  or  of  dictation  from 
outside;  it  habitually,  in  the  course  of  half-yearly  meet- 
ings and  of  addresses  at  the  Bankers'  Institute,  admits 
the  fact  that  it  conducts  its  business  on  inadequate  cash 
reserves,  and  yet  it  is  unable  to  put  its  own  house  in  order 
owing  to  its  own  divergent  interests  and  the  difficulty  of 
inducing  the  smaller  banks  to  work  on  the  same  ideals  as 
those  which  dictate  the  policy  of  the  larger  and  stronger 
ones.  Apart  from  this  danger  of  the  over-multiplication 
of  credit  on  an  inadequate  cash  basis,  the  complete  absence 
of  any  legal  or  other  restrictions  on  the  operations  of 
English  banking  enables  it  to  work  with  extraordinary 
ease  and  readiness.  As  long  as  good  unpledged  security, 
whether  in  the  form  of  bills  of  exchange,  commodities, 
or  Stock  Exchange  securities,  are  available  in  the  hands  of 

29 


National     Monetary     Commission 

customers  the  banks  can  advance  against  them  to  any 
extent  that  they  consider  prudent.  Prudence  dictates 
in  the  case  of  the  great  majority  of  them  that  a  certain 
proportion  of  cash  to  Habihties  shall  be  maintained,  but, 
as  was  shown  above  in  dealing  with  the  Bank  of  England, 
the  cash  of  English  banking  consists  partly  of  credits  with 
the  Bank  of  England.  These  credits  with  the  Bank  of 
England,  and  consequently  the  cash  credits  of  English 
banking,  can  be  multiplied  as  rapidly  as  the  Bank  of 
England  is  prepared  to  make  advances  or  discount  bills, 
and  so  give  credit  in  its  books.  The  Bank  of  England  is 
subjected  to  weekly  publicity  by  the  appearance  of  its 
accotmt,  which  will  be  dealt  with  later,  and  it  watches 
over  its  proportion  of  cash  to  liabilities  with  a  vigilance 
which  is  greater  than  that  of  the  rest  of  the  banking  com- 
munity as  a  whole.  Nevertheless,  its  prudence  in  this 
respect  is  the  only  restriction  on  it,  and  we  thus  arrive 
at  the  conclusion  that  the  chief  function  of  the  English 
joint  stock  banks,  that  of  providing  the  mercantile  com- 
munity with  currency  and  credit,  can  be  carried  out  to 
any  extent  as  long  as  their  customers  have  security  to 
offer  and  their  proportion  of  cash  remains  adequate  to 
their  sense  of  prudence.  And  further,  their  proportion 
of  cash  can  be  increased  as  rapidly  as  the  Bank  of  England 
is  prepared  to  make  advances,  which  it  can  and  does  to 
an  extent  which  again  is  only  limited  by  its  own  prudence. 
It  follows  that  this  system,  by  which  checks  drawn 
against  banking  credits  are  the  chief  currency  in  England, 
while  banking  credits  can  be  multiplied  to  any  extent  that 
the  prudence  of  bankers  considers  right  and  are  based  on 
credits  at  the  Bank  of  England  which  can  again  be  mul- 

30 


The    English    Banking    System 

tiplied  without  any  legal  restriction,  has  completely  freed 
the  English  monetary  machine  from  any  regulations 
except  those  imposed  by  its  own  sense  of  duty  and  the 
possible  criticism  of  the  public;  and  the  development  of 
the  use  of  checks  has  thus  completely  nullified  the  attempt 
to  regulate  the  English  currency  system  made  by  Peel's 
Bank  Act  of  1844,  which  will  be  considered  later  when  we 
examine  the  legal  restrictions  imposed  on  the  Bank  of 
England.  Besides  this  absence  of  outside  regulation, 
the  English  monetary  system  is  also  distinguished  by  a 
remarkable  lack  of  cohesion  and  cooperation  among  the 
members  of  its  own  body.  Except  to  a  certain  extent  in 
the  country  districts,  where  the  rates  allowed  to  depos- 
itors and  charged  to  customers  are  to  a  certain  extent 
a  matter  of  convention,  English  banking  works  almost 
entirely  at  the  mercy  of  very  keen  internal  competition. 
It  is  true  that  in  London  the  rate  allowed  to  depositors  is 
to  a  certain  extent  regulated  by  the  Bank  of  England's 
official  rate,  and  is  fixed  and  published.  Even  in  this 
case,  however,  bankers  frequently  make  variations  accord- 
ing to  the  length  of  the  time  for  which  the  depositor  is  pre- 
pared to  fix  the  transaction,  and  on  the  other  side  of  the 
account  the  rate  that  the  banks  charge  for  loans  and 
discounts  is  left  entirely  to  the  higghng  of  the  market, 
each  transaction  being  regulated  by  the  exigencies  of  the 
moment,  the  nature  of  the  security,  and  the  standing  of 
the  customer.  This  extreme  development  of  competition 
leaves  the  market  liable  to  pronounced  depression  in  rates 
at  times  when  slackness  of  trade  or  other  causes  decrease 
the  demand  for  credits.  At  these  times  the  adroit  bill 
brokers  and  discount  houses,  which  are  in  some  respects 

76651— 10— 3  31 


National     Monetary     Commission 

the  most  important  borrowing  customers  of  the  banks  in 
London,  are  enabled  by  the  use  of  this  weapon  of  com- 
petition to  obtain  loans  from  the  banks  at  rates  which 
are  often  below  the  price  that  the  bankers  are  paying  to 
their  depositors.  Hence,  it  follows  that  in  these  times  of 
monetary  ease  the  credit  machine  goes  on  turning  out  its 
product  at  rates  which  are  quite  unremunerative  and 
have  a  detrimental  effect  on  the  market  rate  of  discount, 
and  so  on  the  foreign  exchanges,  thus  increasing  the 
difficulties  of  the  Bank  of  England,  which  at  these  times 
of  extreme  ease  is  without  any  control  of  the  position. 
Against  this  weakness  of  the  system,  however,  must  be  set 
the  advantage  which  the  unrestricted  and  fiercely  com- 
petitive manufacture  of  credit  confers  on  the  mercantile 
and  trading  community. 

A  few  words  should  be  said  concerning  the  form  of 
checks  with  which  the  English  banks  provide  their  cus- 
tomers as  currency.  Legally  a  check  is  a  bill  of  exchange 
drawn  on  a  bank  and  payable  on  demand.  That  is  to 
say,  it  is  an  order  signed  by  a  customer  of  the  bank 
directing  it  to  pay  a  certain  sum  to  another  party  or  to 
himself.  The  form,  however,  can  be  varied  in  various 
methods,  increasing  or  diminishing  the  ease  with  which 
the  check  can  be  turned  into  cash.  The  check  can  be 
made  payable  to  A.  B.  or  bearer,  and  in  this  form  can  be 
taken  to  the  bank  drawn  on  and  immediately  turned  into 
cash.  When  drawn  to  A.  B.  or  order,  a  check  has  to  be 
indorsed,  or  signed  on  the  back,  by  A,  B.  before  the  bank 
drawn  on  will  pay  it.  A  still  further  restriction  is  the 
English  system  of  crossing  checks,  that  is  to  say,  of 
drawing  two  lines  across  the  face  of  the  check,  by  which 

32 


The    English    Banking    System 

mark  it  is  shown  that  the  check  is  not  to  be  paid  in  cash 
across  the  counter  by  the  bank  drawn  on,  but  must  be 
paid  into  a  bank  by  the  payee,  and  so  only  becomes  cred- 
ited to  him  in  his  own  banking  account  through  the  oper- 
ations of  the  clearing  house.  It  is  evident  that  this  pro- 
tection greatly  increases  the  safety  of  the  check,  since  if 
it  fell  into  the  wrong  hands  its  chance  of  being  made 
fraudulent  use  of  is  greatly  diminished.  As  the  lines 
drawn  across  the  face  of  the  check  by  the  bankers'  cus- 
tomers are  often  faint  and  irregular,  it  has  been  found  in 
practice  that  they  lend  themselves  to  the  ingenuity  of 
the  fraudulent,  who  are  easily  enabled  to  erase  them  and 
so  obtain  possession  of  money  that  is  not  meant  for  them. 
Some  of  the  banks  therefore  print  these  crossing  lines  on 
all  the  checks  that  they  issue  to  their  customers  to  be 
filled  in,  and  when  the  customer  wishes  to  obtain  cash 
from  his  bank  on  one  of  these  checks  he  is  consequently 
obliged  to  write  upon  it  "Please  pay  cash,"  and  sign  this 
note  upon  it.  The  extensive  use  of  crossed  checks  thus 
tends  to  make  the  check  still  further  an  instrument  which 
merely  transfers  banking  credits  from  the  books  of  one 
bank  to  another,  since  every  crossed  check  implies  that 
it  can  not  be  turned  into  cash  directly,  but  can  only  trans- 
fer credit  with  one  bank  to  credit  with  another.  Another 
restriction  with  which  custom  has  protected  the  English 
check  is  the  system  of  writing  "not  negotiable"  on  the 
face  of  it.  These  words  do  not  mean  that  the  check  is 
really  not  negotiable,  but  their  legal  effect  is  that  the 
holder  of  the  check  can  not  establish  a  better  right  to  it 
than  the  party  from  whom  he  received  it.  If  therefore 
the  party  from  whom  he  received  it  had  no  right  to  it, 

33 


National    Monetary     Commission 

his  claim  against  the  paying  bank  is  nil.  With  these 
safeguards,  and  with  the  enormous  convenience  of  being 
drawn  to  any  amount  to  fit  the  exact  requirements  of 
each  transaction,  the  check,  although  not  legal  tender, 
has  been  enabled  to  supersede  the  bank  note  in  English 
currency. 

The  chief  function  of  the  joint  stock  banks  having  thus 
been  shown  to  be  the  provision  of  currency  for  the  English 
community,  it  may  further  be  noted  that  a  remarkable 
development  of  their  activity  has  been  the  rapidity  with 
which  they  have  covered  England  with  branch  establish- 
ments. It  was  estimated  in  1858  that  the  total  number  of 
bank  offices  in  the  whole  of  the  United  Kingdom  was  just 
over  2,000;  at  the  present  moment  the  aggregate  branch 
offices  of  four  of  the  English  joint  stock  banks  which  are 
richest  in  respect  of  branch  establishments  have  exceeded 
this  total.  One  bank  in  England  has  over  600  offices,  one 
has  over  550,  two  have  over  400,  three  have  more  than 
200,  twelve  have  more  than  100.  This  multiplication  of 
branch  offices  has  been  carried  out  partly  by  the  absorp- 
tion by  the  joint  stock  banks  of  the  smaller  institutions 
in  the  country,  whether  private  or  joint  stock,  and  partly 
by  the  rapidity  with  which  they  have  opened  branches  in 
the  great  provincial  centers  and  their  suburbs,  and  to  a 
moderate  extent  in  the  small  country  towns.  The  result 
of  it  is  to  give  the  English  monetary  system  the  power  of 
easily  supplying  the  needs  of  the  various  parts  of  the 
community  as  the  requirements  of  others  ebb  and  flow. 
At  the  same  time  this  rapid  development  increases  the 
competition  between  the  various  English  banks,  which 
we  have  already  shown  to  be  carried  to  an  almost  excess- 

34 


The    English     Banking     System 

ive  degree,  and  by  the  wide  local  distribution  of  their 
liabilities  enhances  the  possibility  of  strain  on  them  in 
times  of  difficulty. 

The  rapid  increase  in  these  various  centers  at  which  the 
public  can  obtain  banking  facilities  of  the  modern  English 
kind — that  is  to  say,  the  right  to  draw  checks — is  certainly 
one  of  the  influences  which  have  reduced  the  circulation  of 
bank  notes  in  England  in  the  hands  of  the  public,  but  it 
has  probably  tended  slightly  to  increase  or  maintain  the 
circulation,  or  at  least  issue,  of  Bank  of  England  notes,  since 
all  these  widely  dispersed  branches  of  the  other  banks 
require  to  have  a  certain  number  of  Bank  of  England  notes 
in  their  tills  as  reserve  against  demands  on  them.  An  arti- 
cle in  the  Bankers'  Magazine  of  February,  1909,  from  which 
the  above  figures  of  banking  branch  development  were 
taken,  discusses  this  interesting  point,  and  the  extent  to 
which  these  two  influences  balance  one  another.  It  shows 
that  the  circulation  of  English  country  bank  notes  has 
diminished  from  an  average  for  the  year  1872  of  over  5  mil- 
lions, to  an  average  for  the  year  1908  of  less  than  half  a  mil- 
lion— £439,800  to  be  exact.  During  the  same  period  the 
Bank  of  England's  note  circulation  has  risen  from  25^  mil- 
lions in  1872  to  about  28 1  millions  for  the  average  of  1908. 
It  estimates  that  there  are  fully  4,600  bank  offices  in  Eng- 
land and  Wales  requiring  Bank  of  England  notes  as  till 
money,  which  did  not  do  so  in  1872,  and  points  out  that  if 
on  the  average  each  office  held  about  £700  of  Bank  of  Eng- 
land notes  as  reserve  against  demands,  the  increase  in  the 
Bank  of  England  note  issue  would  thus  be  roughly  ac- 
counted for.  It  adds  that  some  banking  authorities  esti- 
mate the  amount  of  Bank  of  England  notes  held  by  the 

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National     Monetary     Commission 

other  banks'  branches  at  a  very  much  higher  figure,  and 
points  out  that  it  is  very  desirable  that  statements  should 
be  made  by  the  banks  of  England  and  Wales  as  to  the 
amount  of  Bank  of  England  notes  which  they  hold.  Cer- 
tainly any  such  light  that  the  banks  could  be  prevailed 
upon  to  provide  as  to  the  nature  of  the  cash  that  they 
keep  against  demands  would  be  of  very  great  interest; 
but  the  banking  community  does  not  show  itself  very 
eager  to  respond  to  such  requests  as  these  for  light  upon 
the  manner  in  which  it  conducts  its  business. 

Besides  thus  providing  the  mercantile  community  of 
England  with  currency  and  credit,  the  banks  fulfill  highly 
important  functions  in  the  discount  market  of  London. 
We  have  already  seen  that  an  important  item  in  their 
assets  is  one  described  as  cash  at  call  and  short  notice. 
This  so-called  cash  is,  in  fact,  credits  given  by  the  banks 
to  the  discount  houses  of  London  enabling  them  to  carry 
on  their  business  of  discounting  the  bills,  which  are  so  im- 
portant a  feature  of  London's  monetary  system.  The 
rate  at  which  they  make  these  advances  at  call  and  short 
notice  has  a  very  direct  influence  upon  the  rate  at  which 
the  discount  houses  will  take  bills,  and  consequently  upon 
the  foreign  exchanges,  and  it  has  already  been  shown 
that  excessive  competition  among  the  banks  often 
delivers  them  into  the  hands  of  the  discount  houses  and 
impels  them  to  lend  money  at  lower  rates  than  those 
which  they  are  receiving  on  it.  The  policy  upon  which 
they  appear  to  work  is  the  theory  that  it  is  better  to 
have  any  rate  for  these  amounts  that  they  lend  to  bor- 
rowers of  exceptionally  good  credit  than  none,  and  they 
are  enabled  to  do  so  without  material  loss,  because  a 

36 


The    English     Banking-     System 

considerable  part  of  the  money  which  they  hold  is  on 
current  account  and  not  on  deposit.  Their  system  of 
including  their  current  and  deposit  accounts  together 
makes  it  impossible  to  decide  on  what  proportion  of  the 
money  for  which  they  are  responsible  they  are  paying 
interest.  Only  one  of  the  large  joint-stock  banks  sepa- 
rates its  current  from  its  deposit  accounts  in  its  balance 
sheets.  This  is  the  Union  of  London  and  Smith's  Bank, 
the  latest  balance  sheet  of  which,  dated  December  31, 
1908,  showed  that  while  its  current  accounts  stood  at  25 
millions,  the  amount  that  it  held  on  deposit  only  amounted 
to  I  of  millions. 

If  this  proportion  were  general  throughout  the  banking 
community  it  is  evident  that  a  large  proportion  of  the 
moneys  that  they  hold  on  behalf  of  the  public  is  earning 
no  interest  from  the  banks,  since  it  is  not  usual  for  inter- 
est to  be  paid  upon  current  accounts,  but  since  most  of 
the  bankers  leave  the  proportion  between  their  current 
and  deposit  accounts  in  obscurity,  it  is  impossible  to  speak 
positively  on  this  point.  We  can  only  be  certain  that  the 
bankers  occasionally  do  make  loans  to  the  discount  houses 
at  rates  which  are  below  the  allowance  that  they  make  to 
their  depositors,  which  in  London  are  usually  ij  per  cent 
below  Bank  rate.  This  it  may  be  remarked  is  the  only 
direct  connection  between  the  official  rate  and  the  rates 
granted  or  charged  by  the  other  banks. 

Some  of  the  banks  include  under  this  heading  "cash  at 
call  and  short  notice"  advances  which  they  make  to  the 
Stock  Exchange  for  the  fortnightly  periods  that  elapse 
between  its  settlements.  The  funds  that  they  so  use  obvi- 
ously have  an  important  effect  upon  the  marketability 


37 


i  b 


National     Monetary     Commission 

and  price  of  securities  in  London.  On  the  first  day  of 
every  settlement  it  is  usual  to  see  rates  quoted  as  those  at 
which  the  banks  are  lending  to  their  stock  exchange 
clients  for  the  financing  of  speculative  commitments.  In 
the  arrangement  of  these  rates  a  certain  amount  of  com- 
bination and  cooperation  among  the  banks,  or  some  of 
them,  has  grown  up  as  a  matter  of  custom,  but  since  for 
this  class  of  accommodation  the  bankers  are  subject  to 
competition  on  the  part  of  the  agencies  of  the  foreign 
banks  and  the  big  finance  houses  it  is  often  found  difficult 
to  maintain  even  this  amount  of  harmonious  working 
among  the  bankers. 

It  has  been  shown  that  the  rate  at  which  the  banks 
make  advances  to  the  discount  houses  has  an  important 
effect  upon  the  market  rate  of  discount  in  London,  but 
the  banks  exercise  a  still  more  important  and  direct  effect 
upon  this  discount  rate  by  being  themselves  large  buyers 
of  bills.  It  is  impossible  to  gauge  exactly  the  extent  to 
which  they  hold  bills  among  their  assets,  since  many  of 
them  in  their  balance  sheets  include  their  discounts  along 
with  their  loans  and  advances.  Among  the  many  sug- 
gestions that  reformers  have  put  forward  in  the  matter 
of  English  banking,  one  is  that  this  item  of  the  banks' 
holding  of  bills  should  be  separately  stated.  But  though 
this  obscurity  in  the  statements  of  the  English  banks 
makes  it  impossible  to  know  the  precise  extent  to  which 
they  hold  bills,  there  is  no  doubt  their  purchases  of  them 
are  on  the  whole  the  most  important  influence  upon  the 
market  rate  of  discount  in  London.  Nearly  all  the  dis- 
count houses,  whose  functions  will  be  described  later, 
buy  bills,  largely  with  the  intention  of  reselling  them  to 

38 


The     English     Banking     System 

customers,  of  whom  the  joint-stock  banks  are  the  largest 
and  most  important  and  most  regular  buyers,  and  it  is 
contended  by  the  discount  houses  that  the  market  rate 
of  discount,  for  which  they  themselves  are  generally  sup- 
posed to  be  responsible,  is  really  and  in  fact  regulated  by 
the  price  at  which  the  big  joint-stock  banks  are  prepared 
to  buy.  This  being  so,  since  the  market  rate  of  discount 
is  perhaps  the  most  important  influence  on  the  foreign 
exchanges  and  so  on  the  inward  and  outward  movements 
of  gold,  it  will  be  seen  that  this  function  of  the  bankers  is 
one  of  the  greatest  possible  importance  from  the  point  of 
view  of  London's  free  market  in  gold. 

Besides  thus  regulating  the  price  at  which  bills  of 
exchange  can  be  discounted  in  London,  the  banks  have 
in  recent  years  taken  an  increasingly  large  and  important 
part  in  the  creation  of  bills  of  exchange  by  placing  their 
acceptances  at  the  disposal  of  their  customers.  A  bill  of 
exchange  being  an  order  signed  by  A,  directing  B  to  pay 
a  certain  sum  of  money  to  himself.  A,  or  to  a  third  party, 
C,  it  is  obvious  that  the  standing  and  position  of  B,  who 
is  called  the  acceptor  of  the  bill,  is  of  the  greatest  possible 
importance  to  its  negotiability.  The  business  of  accept- 
ance will  perhaps  be  described  more  opportunely  when 
we  come  to  examine  the  functions  of  the  merchant  firms, 
of  whose  business  it  is  now  perhaps  the  most  characteristic 
part.  The  increasing  extent  to  which  the  bankers  have 
in  recent  years  intruded  into  this  class  of  business  is  a 
grievance  that  is  resented  rather  keenly  by  the  merchant 
firms,  or  accepting  houses,  as  they  are  often  called.  It  is 
contended  by  the  latter  that  the  business  of  acceptance  is 
a  special  function  for  which  special  training  is  required, 

39 


National    Monetary     Commission 

and  that  the  joint-stock  banks  rarely  have  available  the 
special  abilities  that  make  for  its  proper  conduct.  On 
the  other  hand,  the  high  standing  of  the  joint-stock  banks 
and  their  big  reserve  resource  in  the  shape  of  their  uncalled 
capital  makes  their  acceptances  an  exceptionally  fine 
credit  instrument,  and  it  seems  natural  enough  that  they 
should,  to  a  certain  extent  and  within  moderate  limits, 
place  these  facilities  at  the  service  of  their  customers.  By 
doing  so,  they  give  their  hall  mark  to  a  great  mass  of  paper 
which  becomes  readily  negotiable  and  easily  turned  into 
cash  by  the  operations  of  the  discount  market  and  of 
the  other  banks.  But  their  intrusion  into  this  business, 
which  was  formerly  largely  in  the  hands  of  the  accepting 
houses,  is  complicated,  though  in  appearance  rather  than 
in  fact,  by  the  bankers  also  exercising  an  important  func- 
tion in  watching  over  and  sometimes  regulating  the  ex- 
tent of  the  business  done  by  the  accepting  houses.  This, 
however,  is  also  a  matter  which  will  be  better  dealt  with 
later  on. 

Finally  it  may  be  added  that  the  English  joint-stock 
banks  are  now  showing  a  disposition  to  engage  to  some 
extent  in  the  business  of  dealing  in  foreign  exchange 
which  has  hitherto  been  left  to  the  finance  houses  and 
foreign  firms  established  in  London.  The  London  and 
County  and  the  London  City  and  Midland  banks  have  now 
established  regular  foreign  exchange  departments.  This 
development  is  generally  welcomed  as  a  sign  of  a  desire  on 
the  part  of  the  banks  to  widen  their  horizon  and  to 
come  into  closer  touch  with  the  affairs  of  the  financial 
world  at  large,  but,  as  in  the  case  of  the  banks'  increasing 
interest  in  acceptance,  there  are  some  critics  who  consider 

40 


The    English     Banking     System 

that  it  is  better  for  the  bankers  to  stick  to  their  obvious 
and  highly  important  function  of  providing  the  community 
with  credit  and  currency,  and  taking  care  of  the  money 
of  their  customers. 

(C)    THE    SCOTCH    BANKS. 

The  functions  performed  by  the  Scotch  banks  are 
essentially  similar  to  those  already  described  as  being 
carried  out  by  their  English  brethren.  The  differences 
between  the  currency  system  of  the  two  countries  are  in 
degree  rather  than  in  essence.  In  Scotland  the  note  issue 
had  made  a  harder  fight  for  its  existence  than  in  England, 
owing  no  doubt  to  the  fact  that  the  Bank  of  England's 
monopoly  did  not  extend  to  Scotland  and  that  the  great 
Scotch  joint  stock  banks  therefore  extended  the  system 
of  using  notes  as  currency,  while  the  development  of  joint 
stock  banking  in  England  was  necessarily  opposed  to  it, 
since,  as  has  been  shown  above,  joint  stock  banks  in  Eng- 
land with  an  office  in  London  were  unable  to  issue  notes. 
Nevertheless,  even  in  Scotland  the  advantages  of  the  check 
have  told  in  its  favor,  and,  as  will  be  seen  below,  liabilities 
of  Scotch  banks  under  note  issue  are  now  much  smaller 
than  those  under  deposit  as  current  accounts. 

The  article  in  the  Banker's  Magazine,  from  which 
we  have  quoted  above,  showed  that  the  Scotch  note 
circulation  had  increased  from  £5,332,000  in  1872  to 
£7,173,000  in  1908.  This  increase,  when  compared  with 
the  fact  that  the  note  issues  of  the  English  country  banks 
have  during  the  same  period  diminished  almost  to  vanish- 
ing point,  shows  that  the  bank  note  is  much  more  tena- 
cious of  life  north  of  the  Tweed.     This  is  partly  owing  to 

41 


National     Monetary     Commission 

the  fact  that  in  Scotland  notes  may  be  issued  of  the  denom- 
ination of  £  I ,  whereas  in  England  the  smallest  allowed  is  of 
£5,  so  that  the  note  was  thus  circulated  more  easily  among 
the  poorer  classes  in  Scotland  and  so  gained  and  retained 
a  hold  upon  a  much  wider  circle  of  the  community.  In 
this  respect,  as  in  others,  Scotch  banking  is  more  demo- 
cratic than  English,  and  provides  its  facilities  for  a  poorer 
and  lower  class  of  the  community,  though  this  distinction 
between  the  banking  systems  of  the  two  countries  is  being 
rapidly  diminished.  Especially  in  its  early  days  it  laid 
itself  out  much  more  readily  to  the  encouragement  of  the 
small  capitalist  and  borrower,  often  granting  him  facilities 
against  security,  or  an  absence  of  security,  which  would 
have  been  only  regarded  as  feasible  under  quite  excep- 
tional circumstances  in  England.  A  very  interesting 
system  was  at  one  time  fairly  general  in  Scotland,  and 
is  even  now  by  no  means  obsolete.  It  was  the  system 
described  as  that  of  cash  credits,  by  which  borrow^ers 
were  able  to  go  to  banks  and  obtain  advances  against 
the  joint  personal  security  of  themselves  and  one,  or  two, 
or  three  friends.  By  this  means,  in  which  a  kind  of  co- 
operative responsibility  was  recognized  as  a  security  by 
the  Scotch  bankers,  very  poor  borrowers  were  enabled  to 
obtain  banking  facilities,  and  many  instances  are  recorded 
in  which  by  a  loan  of  this  kind,  of  quite  small  importance 
from  the  banking  point  of  view,  foundations  of  fortunes 
have  been  laid  and  the  general  commercial  prosperity  of 
the  community  has  been  furthered  in  a  very  satisfactory 
manner.  And  even  now,  though  in  the  great  Scotch 
centers  of  business  the  English  system  of   making  ad- 


42 


The    English    Banking    System 

varices  only,  or  chiefly,  against  definite  security  pledged 
as  collateral  obtains  to  a  great  extent,  yet  the  essential 
difference  between  Scotch  and  English  banking  is  still 
this  readiness  of  the  former  to  take  into  consideration 
the  personal  standing  of  the  applicant  rather  than  the 
stuff  or  paper  which  he  brings  to  it  as  security  for  an 
advance. 

Banking  by  branches  in  Scotland  has  proceeded  even 
more  rapidly  than  in  England,  and  the  percentage  of 
branches  per  head  of  the  population  is  higher  in  the 
northern  part  of  the  Kingdom.  This  wide  diffusion  of 
banking  facilities  in  Scotland  has  been  largely  brought 
about  by  the  fact  that  its  banks,  having  the  privilege 
of  note  issue,  were  able  to  hold  their  own  notes  as  "till 
money,"  so  economizing  in  the  matter  of  cash.  The  fol- 
lowing passage  is  from  a  work  entitled  "Scottish  Bank- 
ing, 1865-1896,"  by  A.  W.  Kerr,  author  of  a  History  of 
Banking  in  Scotland: 

"Were  it  not  for  the  power  to  issue  notes,  and  the 
readiness  with  which  the  public  receive  them,  the  banks 
could  never  have  afforded  to  open  a  third  of  the  branches 
which  have  been  established.  The  reason  for  this  is  a 
very  simple  one.  Without  the  right  of  issue  a  bank 
must,  at  every  one  of  its  offices,  hold  the  whole  of  its 
balance  of  cash  in  the  shape  of  coin,  or  of  notes  of  other 
banks,  which,  as  far  as  it  is  concerned,  are  as  unprofit- 
able as  coin.  Such  balances  entail  a  complete  loss  of 
interest  which  can  only  be  borne  where  the  amount  of 
business  is  of  considerable  extent.  There  are  probably 
not  above  100  (at  most  200)  localities  in  Scotland  that 
would  satisfy  such  conditions.  When,  however,  a  bank 
can  hold  its  till  money  in  the  shape  of  notes,  it  is  enabled 


43 


National     Monetary     Commission 

to  extend  its  operations  into  districts  which  would 
otherwise  be  quite  inaccessible.  It  is  for  this  reason, 
and  for  this  almost  entirely,  that  the  Scotch  banks 
have  been  able  to  develop  their  branch  systems  to  an 
extent  that  has  made  Scotland  notable  as  having  the 
greatest  supply  of  bank  offices  in  proportion  to  popula- 
tion of  all  the  countries  of  the  world." 

The  authority  of  a  practical  Scotch  banker  is  equally 
emphatic  on  the  point.  Mr.  Robert  Blyth,  general 
manager  of  the  Union  Bank  of  Scotland,  read  a  paper  at 
the  thirty-first  annual  convention  of  the  American  Banking 
Association,  in  October,  1905,  on  the  subject  of  Scottish 
banking.  In  the  course  of  this  very  interesting  paper  he 
made  the  following  statement :  "  It  is  in  another  quarter 
altogether  that  the  Scotch  banks  find  the  value  of  the  £1 
note.  It  is  the  unissued  notes  in  the  tills  of  the  branch 
offices,  forming  the  till  money  at  more  than  a  thousand 
branches,  wherein  the  real  value  lies.  Without  them  the 
banks  would  require  to  keep  £8,000,000  or  £10,000,000  of 
gold  coin,  not  as  a  reserve  but  as  till  money.  It  is  these 
£1  notes  which  have  enabled  branch  offices  to  be  planted 
in  every  part  of  the  country." 

It  thus  appears,  from  the  highest  possible  authority, 
that  the  Scotch  banks  are  enabled  by  their  right  of  note 
issue  to  economize  gold  to  the  extent  of  £8,000,000  or 
£10,000,000,  and  it  is  amusing  to  observe  how  the  objects 
aimed  at  by  Peel's  legislation  with  regard  to  note  issue 
have  thus  been  defeated  even  more  completely  in  Scot- 
land than  in  England.  In  England,  as  has  been  shown, 
banking  turned  the  flank  of  Peel's  Act  by  developing 
the   use   of   checks,  which    superseded    the    note   as   the 


44 


The    English     Banking     System 

common  form  of  payment  in  daily  transactions.  In 
Scotland,  banking  evaded  the  spirit  of  Peel's  regulations, 
which  were  intended  to  insure  that  every  addition  to 
currency  should  be  secured  on  an  addition  to  the  bullion 
held  by  it,  by  actually  economizing  bullion  to  the  extent 
of  £8,000,000  or  £10,000,000. 

Scotland  used  the  same  weapons  as  England,  namely, 
the  check  and  the  development  of  deposit  banking.  The 
table  given  below  shows  that  the  eight  Scotch  banks  had, 
according  to  their  latest  balance  sheets,  £7,000,000  of  notes 
outstanding,  and  £108,000,000  of  liability  on  deposits  and 
drafts.  With  regard  to  the  latter  item  Peel's  regulations 
had  nothing  to  say,  and  since  ordinary  banking  prudence 
demanded  that  some  cash  should  be  held  against  it,  and 
since  the  gold  held  against  notes  was  not  specially  ear- 
marked as  such,  Scotch  banking  was  able  to  treat  its  cash 
against  deposits  as  the  basis  both  of  its  notes  and  deposits 
and  so  produce  the  economy  which  is  boasted  of  by  its 
champions.  Its  ' '  authorized ' '  note  issue  at  the  time  of 
Peel's  Act  was  £3,087,000  and  has  since  been  reduced  by 
lapses  to  £2,676,000.  The  law  thus  compels  it  to  hold 
£4,500,000  of  bullion  against  the  present  excess  above  this 
limit.  But  the  law  says  nothing  concerning  cash  to  be 
held  against  deposits,  and  the  metallic  basis  of  these  is 
probably  extremely  slender,  if  the  cash  held  against  notes 
is  set  on  one  side ;  but  it  is  impossible  to  detect  its  actual 
amount,  since  the  Scotch  banks  include  with  their  cash 
their  balances  at  the  Bank  of  England,  etc.  And  the  net 
result  is,  that  when  the  proportion  of  its  cash  to  its  total 
liabilities  on  notes  and  deposits  is  worked  out  it  is  found 


45 


National    Monetary     Commission 


to  be  decidedly  low,  even  when  compared  with  English 
practice.     The  following  table  speaks  for  itself: 


[Pounds  sterling  ] 


(i) 

Note  circu- 
lation. 

(2) 

Deposits, 
drafts,  etc. 

(3) 

Total,  notes, 
deposits,  etc. 

(4) 
Gold  and 
silver  coin, 

notes  of 
other  banks, 
cash  at 
Bank  of 
England, 
and  checks 
in  course 
of  trans- 
mission. 

Propor- 
tion of 
(4)  to 
(3) 

Bank  of  Scotland 

Clydesdale 

I,  118,838 
843, 212 

974.797 

805,593 
728,953 

I, 003, 428 
907. 274 

18.053,470 
12, 207, 019 

14,894.337 

IS, 269,045 
7,452.486 

14.335.056 
13, 115, 842 

19,  172,308 
13,050,  231 

15.869.  134 

16,  074,  638 
8,  181,439 

15.338,484 

14. 023, 116 

1,547-  782 
I.  764.547 

I,  912, 208 

01, 146,457 
956.054 

01,425,437 

1,349.  124 

Per  cent. 
8.1 

13. S 

Commercial    Bank    of 

National  Bank  of  Scot- 
land      -    

7.1 

II. 7 

9.3 

9-6 

North  of  Scotland 

Royal  Bank   of   Scot- 

Union  Bank  of  Scot- 

British  Linen  Bank 

6.382,095 
811, 116 

95.327.255 
12, 703,271 

loi, 709.350 
13.Si4.387 

10, loi, 609 
61,972,  151 

9  9 

o  Does  not  include  checks  in  hand  and  in  transit. 
*  This  total  includes  loans  at  call  or  short  notice. 

It  will  be  observed  that  owing  to  the  absence  of  uni- 
formity which  is  characteristic  of  British  banking  accounts, 
it  is  impossible  to  make  this  table  statistically  satisfactory. 
Two  of  the  banks  include  their  checks  in  hand  or  in  transit 
along  with  other  items,  so  that  it  is  impossible  to  include 
them  with  their  cash,  as  is  done  by  some  of  the  others, 
while  some  state  them  as  a  separate  item  by  itself.  If  it  is 
reasonable  to  include  a  check  on  another  bank  as  a  cash 
asset  (and  some  purists  maintain  that  neither  a  check  on 
or  a  note  of  another  bank  has  any  right  to  be  so  treated) 
the  cash  holding  of  these  two  banks  should  be  somewhat 

46 


The    English     Banking     System 

higher  than  they  are  shown  to  be  in  the  above  table. 
Even  so,  however,  the  general  level  of  cash  proportion 
would  remain  low;  what  it  would  be  if  real  physical  cash 
alone  were  considered  it  is  impossible  to  guess,  for  this  is  a 
point  on  which  banking  accounts  in  Scotland,  as  in  Eng- 
land, are  persistently  reticent. 

It  will  also  be  noticed  that  one  of  the  banks,  which  we 
have  consequently  left  out  of  the  table,  follows  the  bad 
practice  of  many  of  the  English  country  banks  and  includes 
in  its  cash  item  its  loans  at  call  or  short  notice. 

The  bank's  acceptances,  being  a  liability  of  a  special 
kind,  and  specially  secured,  are  not  included  in  the  table. 

It  should  be  observed  that  the  notes  which  the  Scotch 
banks  hold  as  till  money  do  not  appear  in  the  above  state- 
ment, for  until  they  are  issued  they  are  not  a  liability,  and 
though  they  are  treated  by  the  banks  in  practice  as  an 
asset,  they  can  not  figure  as  such  in  a  balance  sheet.  That 
they  are  practically  treated  as  such  is  witnessed  by  Mr. 
Blyth,  as  quoted  above,  when  he  says  that  without  them 
the  banks  would  require  to  keep  8,000,000  or  10,000,000 
of  gold  coin.  And  it  is,  of  course,  this  habit  of  regarding 
unissued  notes  as  a  banking  asset  in  the  shape  of  till 
money  that  accounts  for  the  low  reserve  of  actual  cash 
that  the  Scotch  banks  show. 

Scotch  banking  is  so  generally  regarded  as  one  of  the 
highest  achievements  of  the  banking  intelligence  that  some 
hesitation  is  natural  in  criticising  the  system  by  which, 
according  to  its  own  evidence,  it  has  obtained  most  of  its 
success.  At  the  same  time,  it  is  difficult  to  avoid  the  con- 
clusion that  a  serious  danger  lurks  in  a  system  which  re- 
gards a  banker's  unissued  promise  to  pay  in  the  light  of  a 

76651—10 4  47 


National     Monetary     Commission 

banking  asset.  Mr.  Blyth  points  out  that  these  unissued 
notes  are  "not  a  reserve  but  till  money,"  but  the  distinc- 
tion between  till  money  and  reserve  is  one  upon  which  it  is 
possible  to  lay  too  much  stress.  In  assessing  the  strength 
of  a  bank  it  is  usual  to  compare  the  amount  of  its  cash  in 
hand,  as  a  whole,  with  the  amount  of  its  liability  to  the 
public  on  deposit  and  current  account,  etc.,  and  note  cir- 
culation if  any.  The  cash  in  hand,  as  a  whole,  consists  of 
the  till  money  and  cash  reserve.  If  the  till  money  con- 
sists to  any  extent  of  the  bank's  own  promises  to  pay,  it 
follows  that  the  bank's  cash  reserve  as  a  whole  is  to  that 
extent  weakened,  for  it  need  not  be  said  that  in  case  of 
serious  trouble,  which  is  a  contingency  of  which  all  provi- 
dent bankers  have  at  all  times  to  beware,  a  bank's  own 
promises  to  pay  would  be  of  little  service  to  it.  If  a 
bank's  credit  were  doubted,  these  promises  to  pay  would 
not  be  available  for  it  in  meeting  demands  upon  it.  At 
such  periods  the  public  requires  from  its  bankers  not 
promises  to  pay  but  physical  gold.  In  Scotland  the  con- 
fidence of  the  public  in  its  bankers  is  so  great,  and  the 
readiness  with  which  it  circulates  their  promises  to  pay 
appears  to  be  so  ingrained  in  the  national  character,  that 
the  contingency  of  the  demand  of  the  public  for  gold 
seems  to  be  extremely  remote.  The  criticism  therefore 
which  detects  a  weak  point  in  this  asset  upon  which 
Scotch  banking  prides  itself  so  highly  may  be  said  to 
be  merely  academic.  Nevertheless,  when  we  examine 
Scotch  banking  by  the  test  of  figures,  we  find  that  it 
does  actually  work,  as  indeed  would  be  expected  from 
the  statement  of  its  exponents,  on  a  cash  basis  which 
is  decidedly  narrow. 

48 


The    English     Banking     S  y  s  t  e 


m 


Though  the  functions  that  they  perform  are  practically 
the  same  as  that  of  the  English  bankers,  Scotchmen  have 
succeeded  in  avoiding  the  excessive  competition  in  carry- 
ing them  out  which  we  have  seen  to  be  a  weakness  of 
English  banking.  In  Scotland,  on  the  other  hand,  cohe- 
sion and  cooperation  among  the  banks  are  carried  to  an 
extreme  of  which  the  mercantile  community  frequently 
complains.  The  banks  are  few  and  stand  together  like  a 
close  corporation;  they  agree  absolutely  and  arbitrarily 
among  themselves  as  to  the  rates  they  will  allow  to  deposit- 
ors, the  rates  at  which  they  will  advance  or  discount,  and 
the  terms  and  commissions  for  which  they  will  do  business 
for  customers.  The  extent  to  which  this  regulation  of  the 
price  of  the  product  that  they  turn  out  is  carried,  is  almost 
incredible  from  the  English  point  of  view,  and  though  it  is 
contended  by  the  champions  of  the  Scotch  system  that 
it  encourages  that  wholesome  democratic  influence  in 
Scotch  banking  which  is  in  favor  of  the  small  borrower 
of  limited  resources,  who  is  thus  able  to  obtain  accom- 
modation on  the  same  terms  as  much  larger  and  more 
important  customers,  yet  it  must  be  obvious  that  the 
Scotch  banks,  by  making  these  hard  and  fast  agreements 
among  themselves  as  to  the  price  of  the  accommodation 
that  they  will  give,  and  maintaining  it  in  every  case,  are 
in  fact  putting  the  same  price  upon  a  very  different  article. 
The  result  of  it  is  beginning  to  tell  upon  them  a  little  in 
these  days,  since,  when  the  big  Scotch  merchants  and 
manufacturers  find  that  their  local  bankers  charge  them 
the  same  rates  for  accommodation  as  the  small  tradesmen 
of  the  towns,  they  are  naturally  impelled  to  make  arrange- 
ments to  provide  themselves  with  monetary  facilities  some- 

49 


National     Monetary     Commission 

where  south  of  the  Tweed,  where  rates  are  ruled  by  the 
circumstances  of  each  case,  and  competition  and  higghng 
often  in  times  of  monetary  ease  dehver  the  bankers  into 
the  hands  of  the  borrowers.  As  it  is,  the  Scotch  banks 
in  regular  conclave  fix  their  rates  in  accordance  with  those 
current  in  the  London  money  market  or  the  Bank  of 
England's  official  minimum,  and,  having  fixed  them,  stick 
to  them.  The  system  is  very  profitable  to  themselves, 
and  their  customers  certainly  can  not  complain  on  the 
whole  of  the  facilities  with  which  they  provide  them. 
Nevertheless,  the  cast-iron  rigor  with  which  they  work 
hand  in  hand  in  combination  appears  to  be  an  excessive 
development  of  banking  unity,  and  an  ideal  banking  sys- 
tem would  seem  to  lie  somewhere  in  the  middle  between 
the  excessive  competition  of  the  English  bankers  and  the 
cast-iron  combination  of  their  Scotch  brethren.  Finally, 
it  may  be  added  that  it  is  a  little  inaccurate  to  speak  of  a 
Scotch  banking  system,  if  the  phrase  be  taken  to  imply 
that  Scotch  banking  stands  by  itself  and  works  on  its  own 
resources.  In  fact,  it  is  only  an  appendage  of  the  Eng- 
lish system  and  relies  habitually  on  drawing  gold  from 
the  Bank  of  England,  as  its  center  and  the  keeper  of  its 
reserve. 

(D)  THE  PRIVATE  BANKS. 

Any  differences  that  exist  between  the  private  and  joint- 
stock  banks  of  England  lie  in  their  ownership  rather  than 
in  their  functions.  Their  functions  are  the  same,  but  the 
manner  in  which  they  carry  them  out  is  perhaps  influenced 
to  a  slight  extent  by  the  fact,  which  really  distinguishes 
them,  that  the  private  banks  are  owned  by  a  few  partners 


50 


The    English    Banking    System 

who  generally  conduct  the  business  for  themselves  or  exert 
more  or  less  influence  on  it,  while  the  joint-stock  banks  are 
managed  by  salaried  directors  and  officials  on  behalf  of  a 
large  body  of  shareholders  formed  into  a  public  company, 
the  shares  in  which  can  as  a  rule  be  bought  and  sold  on  the 
London  Stock  Exchange.  It  will  be  remembered  that  the 
measure  confirming  the  Bank  of  England's  monopoly 
enacted  that  it  should  be  unlawful  for  ' '  any  body  politic  or 
corporate  *  *  *  or  for  any  other  persons  whatsoever 
exceeding  the  number  of  six  persons  "  to  carry  on  the  note- 
issuing  business  which  was  then  (in  1 709)  regarded  as  the 
only  banking  function.  This  measure  restricted  to  the 
Bank  of  England  the  power  of  uniting  for  banking  purposes 
the  capital  of  a  large  number  of  shareholders,  and  left  it 
faced  only  by  the  competition  of  private  banking  firms, 
consisting  of  not  more  than  six  partners. 

Since  private  enterprise  naturally  precedes  joint-stock 
institutions,  it  goes  without  saying  that  the  private  banks 
of  England  were  the  pioneers  of  the  banking  business.  There 
are  still  in  existence  private  firms  which  were  founded  before 
the  Bank  of  England.  A  goldsmith  called  Child  was  doing 
business  of  a  banking  character  soon  after  1660,  and 
Child's  Bank  still  exists.  Hoare's  Bank  was  instituted  in 
about  1680,  fourteen  years  before  the  Bank  of  England  re- 
ceived its  charter.  Modern  developments  have  almost 
driven  them  out  of  the  field,  and  among  the  leading  banks 
in  the  city  of  London  only  two  are  left  which  can  still  be 
called  private  in  the  old  sense  of  the  word.  There  are  one 
or  two  other  institutions  which  are  on  the  borderland ;  and 
at  the  west  end  of  the  town  several  old  firms,  including 
Child's  and  Hoare's,  have  retained  their  old  constitutions. 

51 


National     Monetary     Commission 

It  was  obviously  inevitable  that  business  of  the  magnitude 
and  widely  extended  responsibility  that  modern  banking 
has  assumed  should  fall  into  the  hands  of  the  joint-stock 
system;  the  regular  practice  which  dictates,  or  ought  to 
dictate,  the  policy  of  banking,  naturally  lends  itself  to 
joint-stock  organization,  as  was  pointed  out  more  than  a 
century  ago  by  Adam  Smith,  and  further,  the  necessary 
maintenance  of  a  uniformly  high  level  of  business  ability 
and  prudence  is  attained  with  some  difficulty  under  a  sys- 
tem which  practically  works  by  the  hereditary  principle. 
The  old  private  banking  firms  were  largely  family  busi- 
nesses, being  passed  from  father  to  son  or  from  one  relative 
to  another  almost  as  a  matter  of  legacy.  It  was  inevitable 
that  the  younger  generations  which  succeeded  to  a  business 
would  be  unlikely  to  devote  the  same  unremitting  attention 
to  its  conduct  as  was  displayed  by  those  who  were  building 
it  up,  and  as  the  profits  of  banking  led  to  rapid  accumu- 
lation of  wealth,  it  was  still  more  natural  that  those  who 
inherited  great  wealth  should,  at  least  in  England  where 
the  outlet  for  a  man's  energies  is  so  wide  and  varied,  prefer 
to  give  much  of  their  time  to  other  occupations  outside  the 
business. 

The  private  banks  thus  made  but  a  weak  resistance 
against  the  competition  of  the  joint -stock  institutions 
worked  in  the  interests  of  shareholders  by  a  set  of  trained 
officials  whose  career  depended  to  a  great  extent  on 
the  success  with  which  they  managed  them.  Gradually 
the  private  banks  were  absorbed  into  the  joint-stock  com- 
panies, and  in  1896  a  large  number  of  the  old  private  firms 
were  amalgamated  under  the  joint-stock  principle  under  the 
title  of  Barclay  &  Co.,  so  named  from  one  of  the  principal 

52 


The    English     B  a  n  k  i  7i  g     System 

private  firms  included.  The  functions  that  they  perform 
a,re,  as  has  been  said,  similar  in  essence  to  those  conducted 
by  the  joint-stock  banks,  and  differences  between  them, 
even  in  degree,  are  so  small  as  to  be  quite  insignificant. 
The  remnants  of  them  form,  with  the  merchant  firms  and 
accepting  houses,  a  kind  of  aristocracy  in  the  city  of 
London,  and  it  is  contended  that  their  survival  gives,  from 
the  high  traditions  and  dignity  which  they  have  derived 
from  their  exceptional  position,  a  certain  high  ideal  of  con- 
duct in  business,  which  is  of  great  value.  It  is  also  occa- 
sionally asserted  that  their  customers  find  them  more  easy 
to  deal  with,  since  the  managers  of  the  joint-stock  banks 
are  alleged  to  be  unable  to  depart  by  a  hair's  breadth  from 
the  strict  rules  under  which  they  conduct  business  without 
an  appeal  to  their  board  of  directors  which  may  probably 
cause  delay;  and  also,  that  the  private  banks  give  a  good 
deal  more  attention  to  the  question  of  finding  suitable  in- 
vestments for  their  customers,  and  in  general  are  enabled 
to  take  a  more  close  and  personal  interest  in  their  business 
connection  with  them.  But  these  are  obviously  matters  of 
minor  detail,  and  in  general  it  may  be  said  that  the  business 
and  the  functions  conducted  by  the  private  banking  firms 
of  Great  Britairt  have  already  been  described  when  we 
enumerated  those  of  the  joint-stock  banks. 

(E)  THE  MERCHANT  BANKERS  AND  ACCEPTING  HOUSES. 

The  most  important  function  of  the  merchant  bankers 
is  not  that  of  banking,  but  of  accepting.  Banking,  in  the 
strict  sense  of  the  term,  they  do  not  engage  in — that  is  to 
say,  they  are  not  prepared  to  meet  claims  upon  them  by 
an  immediate  payment  of  cash  or  legal  tender  over  the 


53 


N  at  i  0  71  a  I     Monetary     Commission 

counter,  but  by  payment  of  a  check  on  one  of  the  banks 
in  the  stricter  sense  of  the  term.  Their  function  is  that 
of  bringing  into  being  the  interesting  and  important  credit 
instruments  known  as  bills  of  exchange.  A  bill  of  ex- 
change, originally  drawn  on  a  merchant  by  a  correspondent, 
from  whom  he  had  bought  goods,  directing  him  to  pay 
the  consideration  for  them  at  sight  or  at  date  named,  has  in 
recent  years  widely  extended  this  function  and  has  become 
an  instrument  by  which  credit  can  be  raised  against  any 
form  of  security  or  collateral,  or  in  some  cases  against  no 
security  at  all  but  the  credit  of  the  parties  named  upon  it. 
It  need  hardly  be  said  that  there  is  an  immeasurable  dif- 
ference between  one  bill  of  exchange  and  another.  Since 
the  bill  is  an  order  by  one  party  to  another  to  pay  a  sum  of 
money,  generally  at  a  subsequent  date,  the  ability  of  the 
party  on  whom  the  bill  is  drawn  to  meet  it  at  the  due  date 
is  a  question  of  overwhelming  importance.  When  the  bill 
arrives  the  party  drawn  on  "accepts"  it  by  signing  his 
name  across  the  front  of  it,  so  intimating  that  he  is  liable 
to  pay  the  sum  named  at  the  date  specified,  and  becoming 
the  acceptor  of  the  bill.  It  is  clear  that  a  bill  accepted 
by  a  small  tradesman  has  no  value  outside  his  own  street, 
if  there,  while  one  accepted  by  a  great  merchant  house  of 
unquestioned  standing  is  an  easily  negotiable  credit  instru- 
ment and  also  an  ideal  form  of  investment  for  bankers  and 
others  who  have  to  keep  their  resources  liquid,  since  it  can 
easily  be  discounted  or  turned  into  as  much  immediate 
cash  as  its  prospective  value  at  the  due  date  makes  it 
fetch,  and  at  maturity  it  has  to  be  met  by  its  acceptor. 
The  importance  of  the  acceptor's  name  on  a  bill  thus  led 
merchants  of  first-rate  standing  to  specialize  in  this  form 

54 


The    English     Banking     System 

of  business.  They  gradually  left  off  or  reduced  the 
amount  of  their  actual  mercantile  business  and  confined 
themselves  to  accepting  bills,  for  a  commission,  for  others 
whose  credit  was  less  well  established.  Out  of  bills  of 
exchange,  originally  drawn  against  merchandise  actually 
shipped,  grew  the  finance  bill  drawn  sometimes  in  antici- 
pation of  produce  or  merchandise  to  be  shipped,  some- 
times against  securities,  and  sometimes  against  the  credit 
of  the  parties  to  it. 

The  business  of  acceptance  has  thus  grown  up  as  an 
important  and  separate  function  which  is  largely  in  the 
hands  of  the  leaders  among  the  old  merchant  firms, 
whose  acceptance  of  a  bill  stamps  it  at  once  as  a  readily 
negotiable  instrument.  By  the  service  that  they  per- 
form in  the  creation  of  this  great  mass  of  paper,  the 
merchant  firms,  or  accepting  houses,  as  they  are  generally 
called,  facilitate  the  trade  of  the  world  in  a  most  useful 
and  in  fact  indispensable  fashion  by  providing  credits 
against  mercantile  transactions  which  have  not  yet 
matured.  When  the  wheat  of  America  is  harvested,  but 
has  not  yet  reached  its  market,  the  ultimate  purchaser 
of  it  can  not  be  expected  to  pay  for  it  in  cash,  but 
arrangements  can  be  made  by  which  a  bill  can  be  drawn 
against  it  on  a  first-class  accepting  house,  and  this 
bill  being  readily  negotiable  and  easily  discounted  in  the 
London  market  provides  the  cash,  or  a  considerable 
proportion  of  it,  which  the  wheat  will  ultimately  realize 
when  it  has  been  shipped  to  its  destination  and  passed 
into  the  hands  of  the  consumer.  The  same  process  can 
be  repeated  with  many  articles  of  manufacture  which 
are  still  in  an  inchoate  condition,  and  the  world's  com- 

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National     Monetary     Commission 

mercial  activity,  which  would  be  immeasurably  lessened 
if  each  transaction  had  to  wait  maturity  before  cash 
could  be  raised  against  it,  is  thus  enabled  to  proceed 
with  the  remarkable  velocity  which  modern  conditions 
make  possible.  Nevertheless  the  function  of  the  London 
accepting  houses,  though  of  enormous  importance,  is 
still  to  a  certain  extent  subordinate  to  the  judgment  of 
the  English  banks.  They  finally  decide  whose  paper  is 
most  readily  negotiable,  and,  in  times  when  the  credit 
machine  is  felt  to  be  somewhat  out  of  gear,  the  bankers 
occasionally  discriminate  against  the  paper  of  firms 
which  they  consider  to  have  been  giving  their  accept- 
ance too  freely.  In  this  respect,  as  in  so  many  others, 
the  Bank  of  England  remains  the  final  arbiter,  since  the 
paper  of  an  accepting  house  which  is  questioned  by  the 
other  banks  can  be  negotiated  at  the  Bank  of  England 
through  a  discount  house,  and  the  Bank  of  England  has 
before  now  intervened  with  effect  when  it  considered 
that  questions  raised  concerning  certain  acceptances  have 
been  without  justification. 

This  business  of  acceptance  is  one  into  which  the  other 
banks  have  themselves  recently  intruded  with  considerable 
effect,  accepting  bills  for  their  customers,  home  and  for- 
eign, for  a  commission;  and  there  is  a  certain  apparent 
anomaly  in  the  position  which  makes  them  guardians  of 
the  volume  of  acceptance  created  by  the  private  firms  and 
acceptors  themselves  on  a  steadily  increasing  scale.  Never- 
theless, this  anomaly  has  little  or  no  untoward  effect  in 
practice.  The  bankers  are  naturally  extremely  cautious 
in  raising  any  question  as  to  the  security  of  general  credit 
in  London,  and  they  are  in  many  ways  closely  connected 

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The    English     Banking    System 

with  the  private  accepting  houses,  so  that  the  system, 
which  appears  to  be  full  of  uncomfortable  possibilities  on 
paper,  works  easily  enough  in  practice. 

Other  functions  of  the  merchant  firms  and  accepting 
houses  are  their  activity  in  general  finance  and  in  exchange 
business.  Both  these  functions  arise  out  of  their  old 
business  as  merchants,  which  gave  them  close  connection 
both  with  the  governments  and  the  business  communities 
of  foreign  countries.  Their  connection  with  the  govern- 
ments naturally  led  to  their  providing  credit  facilities  for 
them,  and  to  their  handling  loans  and  other  operations 
which  these  governments  might  have  to  conduct  in  the 
London  market.  Many  of  them  act  as  regular  agents  of 
foreign  governments,  making  issues  of  bonds  on  their 
behalf,  paying  their  coupons,  and  conducting  amortization 
and  other  business  in  connection  with  their  loans;  and 
their  connection  with  the  general  business  community 
inevitably  led  to  their  doing  a  considerable  exchange 
business  with  foreign  countries,  financing  drafts  on  them 
for  the  purposes  of  travel  and  the  innumerable  other 
arrangements  which  necessitate  the  transfer  of  credit  from 
one  country  to  another.  It  should  perhaps  be  added  that 
the  Bank  of  England's  court  of  directors  is  largely  re- 
cruited from  the  ranks  of  the  accepting  firms  and  finance 
houses,  and  the  close  connection  of  these  firms  with  the 
finance,  both  government  and  private,  of  other  countries, 
equips  them  especially  well  to  regulate  the  policy  of  the 
Bank  of  England,  one  of  whose  most  important  functions, 
as  we  have  already  seen,  consists  in  controlling  the  Lon- 
don money  market  with  a  view  to  foreign  demands  upon 
its  store  of  cash, 

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National    Monetary     Commission 

(F)   POSTAL  AND  TRUSTEE  SAVINGS  BANKS. 

The  distinctive  duties  of  savings  banks,  whether  postal 
or  other,  are  such  that  they  can  hardly  be  considered  as 
part  of  the  banking  system  of  England.  A  savings  bank, 
as  they  are  understood  in  this  country,  performs  only  one 
side  of  the  banker's  function,  and  that  perhaps  the  least 
important.  It  is  the  business  of  a  banker  to  make  ad- 
vances, to  create  credit,  and  in  England  to  provide  the 
community  with  currency.  None  of  these  functions  are 
fulfilled  by  the  savings  banks.  It  is  also  the  business  of 
the  banker  to  take  care  of  money  deposited  with  him  by 
the  community,  and  this  part  of  his  function  the  savings 
banks  do  carry  out.  They  are  guardians,  trustees,  safe 
deposits,  but  they  are  not  banks  in  the  true  sense  of  the 
word,  because  they  do  not  make  loans  and  advances,  they 
do  not  discount  bills,  they  do  not  facilitate  trade  and 
finance  by  the  creation  or  circulation  of  any  credit  instru- 
ment, and  the  sole  use  that  they  make  of  the  funds 
deposited  with  them  is  to  invest  them  in  securities  of  a 
specially  restricted  class.  At  the  same  time,  they  have 
some  indirect  influence  upon  the  conduct  of  banking  busi- 
ness in  Great  Britain,  since  the  allowance  that  they  make 
to  depositors  has  an  effect,  especially  in  the  country  dis- 
tricts where  the  banks  compete  keenly  for  deposits,  upon 
the  allowance  made  by  the  English  banks.  It  is  com- 
plained by  the  joint  stock  bankers  that  whatever  bank 
rate  may  be,  and  whatever  may  be  the  rate  for  money  in 
London,  they  can  not  allow  their  country  depositors  less 
than  the  2\  per  cent  which  is  the  regular  allowance  to 
depositors  in  the  post-office  savings  banks.     It  is  natural 

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The    English    Banking    System 

enough  that  the  bankers  should  therefore  complain 
bitterly  of  the  intrusion  of  Government  into  a  business 
which  it  does  not  understand  and  which  it  conducts 
according  to  principles  which  would  land  any  ordinary 
banker  very  speedily  in  ruin.  The  post-office  savings 
bank  keeps  no  attempt  at  a  cash  reserve,  perfectly  reason- 
ably contending  that  the  fact  that  its  deposits  are  secured 
upon  the  consolidated  fund  of  the  United  Kingdom  insures 
for  it  a  confidence  and  security  which  ordinary  bankers 
have  to  arrive  at  by  means  of  a  strong  position  with  regard 
to  cash  and  liquid  assets.  At  the  same  time,  the  savings 
banks,  whatever  be  the  current  price  of  money  and  what- 
ever the  difficulties  they  have  in  reinvesting  funds  de- 
posited with  them  on  terms  which  will  enable  them  to 
show  a  profit,  continue  to  pay  2|  per  cent  to  their  deposi- 
tors. They  did  so  during  the  period  of  abnormally  cheap 
money  in  1896  and  1897,  when  Government  securities 
could  not  be  bought  to  yield  the  2  J  per  cent  which  the 
savings  banks  were  paying,  and  when  consequently  the 
necessarily  considerable  expenses  of  the  conduct  of  the 
business  involved  the  savings  bank  in  heavy  loss.  They 
have  continued  to  do  so  steadily,  in  spite  of  the  subsequent 
depreciation  of  Consols  and  the  other  securities  that  they 
hold,  which  reduced  their  finance  to  a  position  which 
would  be  considered  one  of  insolvency  if  any  private  or 
joint  stock  company  had  to  acknowledge  such  a  state  of 
affairs. 

Their  ostensible  pretext,  the  encouragement  of  thrift 
among  the  working  classes,  is  an  extremely  desirable 
object  in  England,  where  thrift  among  the  working 
classes   is  very  much  to  seek.     At  the  same  time,   the 

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National     M  onetary     Commission 

contention  of  the  bankers  that  they  are  subjected  to 
unfair  competition  is  very  strongly  grounded.  The  regu- 
lations of  the  post-office  savings  banks  have  been  ex- 
panded to  an  extent  which  permits  the  deposit  of  sums 
up  to  £50  in  one  year,  aggregating  £200  altogether,  and 
it  is  clear  that  depositors  who  are  in  a  position  to  make 
deposits  on  such  a  scale  as  this  have  arrived  at  a  point 
at  which  assistance  and  stimulation  by  the  State  are 
unnecessary.  The  rate  allowed  to  them,  though  low 
enough  from  the  point  of  view  of  the  depositor,  is  cer- 
tainly high  when  the  exceptionable  nature  of  the  security 
is  considered  and  when  allowance  is  made  for  the  fact  that 
these  deposits  can  be  withdrawn  at  any  time — immedi- 
ately up  to  £10  if  the  expense  of  a  telegram  is  paid,  and 
after  one  to  two  days'  notice  in  the  ordinary  course  of 
business.  In  fact,  the  post-office  savings  bank  gives  away 
one  kind  of  banking  facility,  that  is,  the  guardianship  of 
the  money  of  depositors,  allowing  them  a  rate  for  its  use 
on  terms  with  which  the  ordinary  bankers  are  quite 
unable  to  compete,  and  it  is  very  fairly  contended  that 
the  amount  that  each  depositor  is  allowed  to  place  with 
the  savings  banks  should  be  reduced,  and  that  the  rate 
allowed  should  also  be  brought  more  closely  into  touch 
with  the  modern  conditions  of  the  money  market.  Prob- 
ably the  really  careful  and  thrifty  members  of  the  class 
for  which  the  post-office  savings  bank  is  designed  to  pro- 
vide facilities  attach  very  little  importance  to  the  rate 
paid  to  them.  Certainly  other  banks  working  under 
ordinary  commercial  conditions  could  not  afford  always 
to  pay  depositors  2|  per  cent  on  their  money,  with  the 
right    of    immediate    withdrawal,    and    their    complaints 

60 


The    English     Banking     System 

against   unfair  competition   by   the   State   thus   have   a 
considerable  basis   of  foundation. 

The  trustee  savings  banks  were  originally  philanthropic 
institutions  founded  by  private  persons  for  the  encour- 
agement of  thrift,  but  in  1817  Parliament  intervened  with 
regulations  for  their  management.  The  most  important 
feature  of  these  regulations  was  the  obligation  imposed 
on  the  trustees  to  invest  the  whole  of  the  funds  with 
the  Government  through  the  hands  of  the  national  debt 
commissioners.  Since  the  establishment  of  the  post-office 
savings  banks  in  1861  many  of  the  trustee  banks  have 
been  closed,  and  the  increase  in  the  deposits  of  the  rest 
has  not  been  nearly  as  rapid  as  that  of  the  new  rivals, 
which  have  the  advantage  of  more  direct  Government 
control. 

(G)  THE  DISCOUNT  HOUSES. 

The  discount  houses  in  London  carry  on  a  business 
which  is  chiefly  ancillary  to  that  of  the  banks.  It  has 
been  shown  that  the  bankers  are  large  buyers  of  bills — 
that  is  to  say,  they  make  large  investments  by  discounting 
bills  of  exchange,  giving  cash  or  credit  for  them  some  time 
before  they  are  due  and  holding  them  until  their  maturity. 
Bills  of  exchange,  which  are  necessarily  and  automatically 
turned  into  cash  on  the  day  of  maturity,  are  obviously  an 
ideal  security  for  a  banker's  investment.  They  are  liquid 
and  readily  negotiable,  and  at  due  date  they  are  cashed, 
without  any  need  for  looking  for  a  buyer  and  without  any 
question  of  market  conditions.  The  great  volume  and 
diversity  of  the  bills  of  exchange  which  come  into  the 
London  market  to  be  thus  melted  and  turned  into  present 
cash  before  their  date  of  maturity  has  caused  the  existence 

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National    Monetary     Commission 

of  a  class  of  dealers  in  bills  who  specialize  in  handling  them 
and  may  be  regarded  as  intermediaries  between  the  holders 
of  the  bills — that  is  to  say,  originally,  the  drawers  of  them,  or 
their  representatives  or  anyone  else  into  whose  hands  they 
may  have  passed  them  on — and  the  bankers,  who  are  the 
ultimate  buyers  and  hold  them  as  investments  until  matu- 
rity. It  is  the  business  of  the  discount  houses  to  buy  these 
bills  on  a  wholesale  scale,  using  for  this  purpose  funds  largely 
lent  them  by  the  banks,  and  to  meet  the  requirements  of  the 
bankers  with  regard  to  the  date  named  and  quality  of  the 
bill,  providing  them  out  of  the  store  that  they  keep  con- 
stantly replenished.  Some  of  the  larger  firms,  and  two 
joint-stock  companies  which  have  applied  the  joint-stock 
principle  with  great  success  to  this  business,  constantly 
keep  a  very  considerable  supply  of  bills  in  their  own  hands. 
Nevertheless,  even  they  still  retain  the  appearance  of  in- 
termediaries to  a  very  great  extent,  and  the  majority  of  the 
discount  houses  are  intermediaries  almost  entirely.  Some 
few  of  them,  commonly  designated  running  brokers,  hold 
practically  no  bills  and  do  a  commission  business  by  taking 
a  parcel  of  bills  from  a  seller  and  disposing  of  them  at  the 
best  possible  terms,  charging  him  a  brokerage  on  the  trans- 
action; but  the  most  common  form  of  the  business  is  the 
one  indicated  above,  by  which  the  discount  houses  keep  a 
considerable  floating  supply  of  bills  always,  with  a  view  to 
disposing  of  them  to  bankers,  meeting  the  requirements  of 
the  latter  in  the  respects  indicated. 

The  function  of  the  discount  houses  is  thus  of  consid- 
erable importance  in  the  London  money  market,  because 
the  terms  on  which  they  do  their  business  may  have  a 
considerable  effect  upon  the  foreign  exchanges   and  so 

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The    English     Banking    System 

upon  the  inward  and  outward  movement  of  gold.  Ulti- 
mately and  in  the  long  run  it  is  probable  that  the  dis- 
count rates  current  in  the  London  money  market  are 
decided  by  the  banks  themselves,  since  if  the  bankers 
decide  that  they  will  not  buy  below  a  certain  rate  that 
rate  is  almost  certain  to  become  very  speedily  effective. 
Nevertheless,  the  discount  houses  may  have  a  con- 
siderable temporary  effect  on  the  rates  current,  since 
if  they  take  a  strong  view  concerning  monetary  proba- 
bilities in  London  their  sentiment  is  almost  certain  to 
express  itself  on  the  rates  current  for  the  moment. 

We  have  also  seen  that  the  discount  houses  fulfill  a  very 
important  function  by  borrowing  funds  ffom  the  bankers 
at  call  and  short  notice.  These  funds  are  regarded  by 
the  bankers,  and  actually  described  in  their  balance 
sheets,  as  cash,  cash  at  call,  and  short  notice.  It  is  a 
somewhat  elastic  extension  of  the  term  "cash"  to  apply 
it  to  money  that  is  being  lent  to  any  borrower,  even  of 
the  highest  credit  and  against  the  most  liquid  possible 
collateral.  But  it  is  always  assumed  by  the  bankers 
that  these  funds  placed  in  the  discount  market  can  be 
called  in  readily  at  any  moment.  That  they  can  be 
called  in  is  practically  a  fact;  but  it  arises  chiefly  from 
the  ability  of  the  discount  houses  when  pressed  for 
repayment  of  these  loans  by  the  bankers  to  fill  the  gap 
in  credit  by  an  appeal  to  the  Bank  of  England  and  the 
production  of  fresh  cash,  as  it  is  called,  by  borrowing 
from  it.  The  discount  houses  take  security  to  the 
Bank  of  England  and  raise  with  it  the  right  to  draw 
checks.  These  checks  they  pay  to  their  bankers,  whose 
cash  at  the  Bank  of  England,  which  we  have  already 

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National     Monetary     Commission 

seen  to  be  regularly  used  as  part  of  the  basis  of  credit 
in  England,  is  thus  increased. 

It  follows  from  the  necessities  of  their  position  that  the 
discount  houses  are  liable  to  be  affected  by  the  least  fluctu- 
ation or  change  in  the  current  value  of  credit,  either  momen- 
tary or  for  the  future.  Any  change  in  the  position  which 
makes  it  appear  that  money  is  going  to  be  dearer  later  on 
will  make  a  considerable  difference  to  the  price  at  which 
they  will  be  able  to  dispose  of  the  large  holding  of  bills  which 
we  have  seen  to  be  their  stock  in  trade.  Any  change  in 
the  position  which  necessitates  an  immediate  demand 
for,  cash  causes  the  bankers  to  call  in  funds  from  them 
and  drives  them. into  the  Bank  of  England,  which  discounts 
bills  for  them  at  its  official  rate,  and  generally  charges 
one-half  of  i  per  cent  more  for  advances.  They  thus 
conduct  their  operations  on  terms  which  require  extremely 
alert  ability  and  a  capacity  for  gauging  monetary  proba- 
bilities not  only  in  England,  but  all  over  the  world, 
since  London's  position  as  the  free  market  in  gold  nec- 
essarily makes  its  rates  extremely  sensitive  to  any 
possibility  of  disturbance  elsewhere.  Besides  the  money 
that  they  habitually  borrow  for  short  periods  from 
bankers,  the  discount  houses  also  have  considerable 
amounts  placed  on  deposit  with  them  by  other  lenders, 
some  of  which  they  employ,  especially  in  times  when  the 
volume  of  bills  is  comparatively  small,  by  loans  to  the 
Stock  Exchange  for  financing  the  speculative  commit- 
ments of  the  public,  and  by  holding  or  carrying  securities 
of  a  reasonably  liquid  character.  They  also  take  some 
part  in  the  underwriting  of  new  loans  and  in  the  general 
financial  business  of  the  London  market. 

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Chapter  II. 

LAW  AND  CUSTOM  IN  THE  ENGLISH  SYSTEM. 

English  banking  is  regulated  by  law  to  a  very  small 
extent.  As  has  been  observed  in  earlier  parts  of  this 
memorandum,  very  strict  regulations  were  imposed  by  the 
act,  generally  known  as  Peel's  Bank  Act,  of  1844,  upon  the 
note  issue  of  the  Bank  of  England  and  of  other  banks  which 
issue  notes  in  the  United  Kingdom,  but,  as  has  before  been 
shown,  these  regulations  are  now  a  matter  of  minor  im- 
portance, owing  to  the  extent  to  which — partly  in  con- 
sequence of  them — the  bank  note  has  been  superseded  in 
England  as  the  currency  of  commerce  and  finance  by  the 
check.  The  chief  function  of  the  English  banker,  as  it  is 
understood  to-day,  is  not  that  of  issuing  notes,  but  of  receiv- 
ing deposits  and  making  advances  which  take  the  form  of 
deposits  and  are  drawn  against  and  circulated  in  the  form 
of  checks. 

This  part  of  the  banker's  business  is  not  in  any  way 
restricted  or  regulated  by  the  law,  and  as  the  great  major- 
ity of  English  bankers  confine  themselves  to  it  and  the 
business  connected  with  it  and  resulting  from  it,  it  follows 
that  the  ordinary  English  banker  rarely  finds  himself 
affected  by  the  law  in  the  management  and  direction  of 
his  business.  Books  on  banking  law  are  devoted  almost 
entirely  to  questions  arising  out  of  ordinary  banking 
practice,  such  as  the  circumstances  under  which  a  banker 
who  has  paid  money  in  reliance  upon  a  forgery  can  recover 
from  the  person  to  whom  he  has  paid  it,  and  give  a  very 
small  proportion  of  their  space  to  the  functions  and  ques- 
tions to  be  discussed  in  this  memorandum.  They  are  left 
almost  entirely  to  the  custom  and  tradition  of  the  business. 

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National    Monetary     Commission 

(A)  THE  BANK  OF  ENGLAND. 

In  the  case  of  the  Bank  of  England,  which  was  instituted 
under  special  circumstances  and  by  a  special  charter, 
certain  definite  arrangements  were  laid  down  by  the  act 
constituting  the  Bank  concerning  its  organization  and 
directorate.  The  act,  which  was  passed  in  1694,  states 
that— 

' '  William  and  Mary  by  the  Grace  of  God  do  hereby 
ordain  and  appoint  that  there  shall  be  from  time  to  time 
for  ever  of  the  members  of  the  said  company,  a  governor, 
a  deputy  governor,  and  24  directors  of  and  in  the  said  cor- 
poration, which  governor,  deputy  governor  and  directors, 
or  any  13  or  more  of  them,  of  which  the  governor  or  deputy 
governor  to  be  always  one,  shall  be  and  be  called  a  court  of 
directors  for  the  ordering,  directing  and  managing  the 
affairs  of  the  said  corporation."  The  act  appointed  the 
first  governor  and  deputy  governor  and  states  that  they 
have  been  chosen  by  a  majority  of  the  subscribers,  having 
£500  each  in  the  capital  stock.  It  also  makes  arrange- 
ments for  the  holding  of  general  meetings  or  courts  ' '  for 
the  appointment  of  governor,  deputy  governor  and  direc- 
tors, and  for  the  making  of  bye  laws,  ordinances,  rules, 
orders  or  directions  for  the  government  of  the  said  cor- 
poration, or  for  any  other  affairs  or  business  concerning 
the  same,"  It  provided  for  the  annual  election  of  the 
governors  and  directors  and  restricted  the  right  of  voting 
at  the  general  courts  to  holders  of  at  least  £500  stock  in 
the  Bank.  No  member  was  allowed  to  have  more  than 
one  vote.  It  was  further  provided  that  no  one  could  be 
governor  of  the  Bank  unless  a  subject  of  England,  natur- 
ally born  or  naturalized,  and  holder  of  £4,000  stock  in  the 

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The    English    Banking    System 

Bank.  The  qualification  for  the  deputy  governor  was 
£3,000,  and  for  directors  £2,000.  The  governor  was  also 
required  to  take  an  oath  to  the  effect  that  he  would  ' '  to 
the  utmost  of  his  power  by  all  lawful  ways  and  means 
endeavour  to  support  and  maintain  the  body  politic  or 
fellowship  of  the  government  and  company  of  the  Bank  of 
England  and  the  liberties  and  privileges  thereof." 

Similar  oaths  had  to  be  sworn  by  the  deputy  governor 
and  directors  and  they  also  had  to  swear  that  they  were 
possessed  of  a  sufficient  holding  of  stock  in  the  Bank. 
Oaths  were  also  administered  to  electors  before  they 
could  give  any  votes  in  the  general  courts  and  also  to  all 
the  "inferior  agents  or  servants  for  the  faithful  and  due 
execution  of  their  several  places  and  trust  in  them 
reposed."  It  was  also  appointed  that  "no  dividend  shall 
at  any  time  be  made  by  the  said  governor  and  company 
save  only  out  of  the  interest,  profit,  or  produce  arising 
out  of  the  said  capital  stock,  or  fund,  or  by  such  dealing, 
buying,  or  selling  as  is  allowed  by  the  said  act  of  Parlia- 
ment, and  that  no  dividend  whatsoever  shall  at  any  time 
be  made  without  the  consent  of  the  members  of  the  said 
corporation  in  a  general  court,  qualified  to  vote,  as 
aforesaid." 

The  management  of  the  Bank  was  left  in  the  hands  of 
the  governor,  deputy  governor,  and  directors,  subject  of 
course  to  the  by-laws  and  directions  that  might  at  any 
time  be  passed  by  the  general  court  of  proprietors. 
Custom  has  enacted  that  its  directors  should  never  be 
chosen  from  the  ranks  of  the  other  bankers.  They  are 
generally  taken  from  the  merchant  firms  and  accepting 
houses. 

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National     Monetary     Commission 

The  charter  did  not  make  any  definite  statement  concern- 
ing one  point  which  has  occasionally  been  debated  and  dis- 
cussed in  later  days,  viz,  the  question  of  any  liability  upon 
holders  of  Bank  of  England  stock.  It  has  occasionally 
been  contended  that  there  is  no  limitation  on  the  liability 
of  holders.  But  it  need  not  be  said  that  the  question  has 
never  been  a  practical  one.  Under  the  national  debt  act 
of  1870,  which  regulated  the  payment  of  the  dividends  on 
the  national  debt  of  Great  Britain,  it  was  provided,  among 
other  things,  that  until  all  the  stock  of  the  English  debt 
had  been  redeemed  the  banks  of  England  and  Ireland 
should  each  continue  to  employ  within  their  offices  a  fit 
person  as  their  chief  cashier  and  another  fit  person  as  their 
accountant  general.  Apart  from  these  provisions,  the 
law  has  left  the  question  of  the  management  and  organi- 
zation of  the  Bank  of  England  to  the  discretion  of  the 
proprietors  and  their  directors. 

The  Bank  of  England's  note  issue  has  been  regulated  in 
a  manner  which  is  well  known  by  Peel's  Act  of  1844,  which 
laid  down  that  the  amount  of  its  fiduciary  issue,  that  is  to 
say,  its  issue  of  notes  against  securities  rather  than  bullion, 
was  to  be  restricted  to  14  millions,  and  that  above  that 
point  for  every  note  issued  the  Bank  should  hold  metal  in 
its  vaults.  It  was  also  enacted  that  if  the  issues  of  any 
country  banks  which  had  the  privilege  of  note  issue  were 
subsequently  to  lapse,  the  Bank  of  England  should  be 
empowered  to  increase  its  fiduciary  issue  to  the  extent  of 
two-thirds  of  the  lapsed  issue.  By  means  of  these  lapses 
the  amount  of  the  fiduciary  issue  has  been  raised  from  the 
14  millions  mentioned  in  the  act  of  1844  to  £18,450,000. 


68 


The    English     Banking    System 

It  is  also  well  known  that  Peel's  Act  of  1844  provided 
for  the  separation  of  the  Bank's  functions  into  two  sepa- 
rate departments,  one  of  which  it  called  the  "  issue  depart- 
ment" and  the  other  the  "banking  department,"  the 
promoters  of  the  act  being  apparently  of  opinion  that  there 
was  some  essential  difference  between  note  issuing  and  the 
other  functions  of  the  banker,  and  that  note  issuing  ought 
to  be  very  specially  regulated  and  restricted,  and  that  as 
long  as  this  were  done  all  would  be  well  with  the  currency 
arrangements  of  the  country. 

A  good  deal  of  confusion  appears  to  have  prevailed  in 
the  minds  of  those  who  were  responsible  for  this  curious 
piece  of  legislation.  It  speaks  of  the  "  Bank  of  England's 
exclusive  privilege  of  banking,"  whereas  the  only  exclusive 
privileges  that  the  Bank  of  England  possessed  were  con- 
nected with  note  issue,  and  at  the  same  time  it  draws 
a  hard  and  fast  line  between  banking  and  note  issuing,  as 
if  the  two  functions  were  wholly  separate.  The  princi- 
ple on  which  it  was  based,  which  appears  to  have  been 
the  theory  that  the  issue  of  notes  was  the  only  form  of 
currency  that  needed  regulation  or  care,  involves  an  ex- 
traordinary oversight  when  it  is  remembered  that  ten  years 
before  this  act  was  passed  joint  stock  banks  had  been 
founded  in  London,  solely  for  the  purpose  of  conducting 
deposit  banking  and  handling  the  check  currency  which 
deposit  banking  creates. 

It  is  perhaps  fortunate  for  English  banking  that  the 
legislature  took  so  one-sided  a  view  of  the  system  which 
it  was  attempting  to  regulate.  Its  regulation  of  the  note 
issue  consisted  in  drawing  a  cast-iron  line,  beyond  which 


69 


National    Monetary     C  ommis  s  to 


n 


no  note  was  to  be  issued  except  with  a  full  bullion  back- 
ing. It  thus,  as  far  as  it  understood  banking,  took  away 
from  the  banker  the  whole  of  his  discretion  concerning 
the  amount  of  bullion  which  he  was  expected  to  keep 
against  his  liabilities.  Had  it  recognized  that  the  check 
currency,  though  only  in  its  lusty  infancy,  was  likely  to 
drive  the  bank  note  out  of  circulation  for  the  ordinary 
purposes  of  commerce  and  finance,  it  may  be  supposed 
that  it  would  have  dealt  with  its  creation  in  an  equally 
drastic  manner.  Fortunately  it  did  not  perceive  this 
development,  though  it  had  already  made  great  progress; 
it  consequently  left  a  door  open  by  which  English  bank- 
ing has  been  able  to  develop  unfettered  and  unrestricted. 
The  regulations  on  the  Bank  of  England's  note  issue  are 
now  a  matter  of  minor  importance.  When  the  banking 
community  goes  to  the  Bank  of  England  for  assistance, 
it  does  not  ask  it  for  notes,  but  for  a  credit  in  the  books 
of  its  banking  department.  As  has  been  shown  in  pre- 
vious sections  of  this  memorandum,  at  the  end  of  the  half 
years,  when  the  English  monetary  community  finds  it 
necessary  to  create  a  large  amount  of  emergency  credit 
and  currency,  it  carries  out  this  operation  easily  and  sim- 
ply by  taking  security  to  the  banking  department  of  the 
Bank  of  England  and  obtaining,  to  the  extent  of  1 5  or  20 
millions,  fresh  credits  in  its  books,  which  are  regarded  for 
English  banking  purposes  as  equivalent  to  so  much  gold. 
The  bank  act  of  1844  also  enacted  that  the  Bank  of 
England  should  publish  once  a  week  a  statement  of  the 
assets  and  liabilities  of  its  two  departments,  and  a  copy 
of  one  of  these  statements  is  here  appended. 


70 


The    English     Banking    System 


BANK    OF    ENGLAND. 

An  account  pursuant  to  the  act  7  and  S  Vict.  cap.  32,  for  the  week  ending 
on  Wednesday,  the  loth  day  of  March,  igog. 

Issue  Department. 

DEBIT. 

Notes  issued £55,  952,  170 

55,952,  170 

CREDIT. 

Government  debt 11,  015,  100 

Other  securities 7,  434,  900 

Gold  coin  and  bullion 37,  502,  170 

Silver  bullion 

55,952,  170 
Dated  the  nth  day  of  March,  1909. 

J.  (t.  Nairne,  Chief  Cashier. 
Banking  Department 

DEBIT. 

Proprietors'  capital £14,  553, 000 

Rest 3,691,483 

Public  deposits  (including  exchequer,  savings  banks,  com- 
missioners of  national  debt,  and  dividend  accounts 17,  267,  641 

Other  deposits 39,  876,  393 

Seven-day  and  other  bills 26,  576 

75,415,093 

CREDIT. 

Government  securities 15,  141,  108 

Other  securities 31,  323,  272 

Notes 27,  280,  175 

Gold  and  silver  coin i,  670,  538 

75,415,093 
Dated  the  i  ith  day  of  March,  1909. 

J.  G.  Nairne,  Chief  Cashier. 

These  weekly  accounts  are  commonly  called  "the  bank 
return,"  and  are  closely  studied  as  containing  the  key  to 
the  position  of  the  Bank  of  England  and  the  available 
resources  of  the  London  money  market.     It  will  be  seen 

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National    Monetary     Commission 

that  the  issue  department  contains  one  Hne  of  HabiHty, 
viz,  the  notes  issued.  On  the  other  side,  giving  the  list 
of  the  assets  held  against  these  notes,  the  first  line  is 
"Government  debt,"  which  is  the  original  debt  from  the 
Government  to  the  Bank,  to  provide  which  the  Bank  of 
England  was  founded  in  1694,  swollen  from  the  original 
£1,200,000  to  over  II  millions  by  subsequent  additions. 
The  next  line,  "Other  securities,"  gives  the  holding  of 
British  Government  stock,  which  raises  the  fiduciary 
backing  of  the  Bank  of  England's  note  issue  to  the 
£  18,450,000  at  which  it  now  stands.  The  rest  of  the  notes 
issued  are  backed  by  gold  coin  and  bullion,  though  the 
line  "  Silver  bullion  "  recalls  the  fact  that  by  the  bank  act 
of  1844  the  Bank  was  empowered  to  hold  silver  against 
its  notes  to  the  extent  of  one-fourth  ot  the  gold  or  one- 
fifth  of  the  total  bullion.  But,  as  has  been  recorded 
above,  it  is  more  than  half  a  century  since  this  right  has 
been  exercised,  and  a  recent  attempt  to  put  it  into  force 
was  so  strongly  resisted  by  city  opinion  that  it  was 
promptly  dropped. 

The  items  in  the  banking  department  require  a  little 
explanation.  The  "Proprietors'  capital"  speaks  for 
itself,  except  that  it  differs  from  that  of  other  English 
banking  companies  by  being  fully  paid  up,  though,  as 
was  observed  above,  there  is  some  doubt  as  to  whether 
there  is  fiuther  Hability  on  it. 

The  next  item  among  the  liabilities,  "the  rest,"  as  it  is 
called,  is  the  Bank  of  England's  reserve  fund  in  the  ordi- 
nary sense  of  the  word — that  is  to  say,  an  accumulation  of 
profits  which  have  not  been  divided  among  the  proprietors 
but  have  been  kept  in  hand  to  strengthen  the  Bank's  posi- 

72 


The    English    Banking    System^ 

tion.  Unlike  most  reserve  funds,  however,  this  item,  "  the 
rest,"  fluctuates  from  week  to  week,  and  may  be  supposed 
to  contain  the  current  profit  and  loss  account  balance.  It 
should  be  added  that,  by  unwritten  custom,  it  is  never 
reduced  below  £3,000,000,  and  the  amount  above  this 
level  at  which  it  stands  at  the  end  of  the  Bank's  half  year 
is  the  amount  available  for  distribution  by  way  of  dividend 
among  the  proprietors. 

The  public  deposits  are  the  deposits  of  the  various  de- 
partm.ents  of  the  British  Government  which  the  Bank 
holds  on  its  account  as  keeper  of  the  national  balances. 
In  the  account  presented  above  this  item  is  shown  swollen 
by  the  collection  of  the  direct  taxes,  which  proceeds  during 
the  quarter  from  January  to  March.  The  other  deposits 
are  the  Bank's  liabilities  to  all  customers  other  than  the 
British  Government,  and  so  include  the  balances  of  the 
other  banks  which  use  the  Bank  of  England  as  their  banker 
and  holder  of  a  considerable  portion  of  their  cash  reserves. 
Included  along  with  them,  however,  there  are  the  balances 
of  the  Bank's  private  customers,  including  municipalities, 
colonial  goverments,  etc.,  and  the  amount  of  the  bankers' 
balances  on  which  the  resources  of  the  London  money 
market,  apart  from  the  Bank  of  England,  really  depend, 
can  only  be  guessed  at.  It  is  believed  that  they  gen- 
erally average  about  22  or  23  millions,  and  it  is  generally 
found  that  when  the  amount  of  •  the  other  deposits  as  a 
whole  falls  to  about  41  millions,  money  in  Lombard  street 
is  scarce  and  comparatively  dear. 

In  the  account  given  above  it  will  be  seen  that  the 
pressure  of  tax  payments  has  reduced  them  below  40 
millions,    and,    as   usual   during   the   January   to    March 

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National    Monetary     Commission 

quarter,  the  market  was  actually  at  the  date  of  this 
return  obliged  to  borrow  from  the  Bank  of  England  in 
order  to  restore  its  balances. 

The  item  of  seven-day  and  other  bills  is  an  old- 
fashioned  form  of  remittance  provided  by  the  Bank 
and  used  chiefly  for  the  purposes  of  revenue  payments. 

On  the  other  side  of  the  account  we  find  the  Bank's 
assets  divided  into  "Government"  and  "Other  securi- 
ties" and  its  holding  of  its  own  notes  and  of  gold  and 
silver  coin.  Here  again  "  Government "  means  only  the 
British  Government,  and  under  the  item  "Government 
securities"  are  included  the  Bank's  holding  of  consols 
and  other  British  Government  stocks,  treasury  bills,  or 
other  forms  of  unfunded  debt,  and  likewise  any  prom- 
ises to  pay  that  it  may  hold  from  the  Government  against 
temporary  advances  that  it  may  have  made  to  it  in  the 
ordinary  course  of  its  relation  with  it  as  its  banker. 

The  "Other  securities"  item  is  equally,  or  still  more, 
comprehensive.  It  includes  the  Bank's  holding  of  stocks 
or  shares,  any  bills  that  it  may  have  taken  from  the 
London  market,  its  loans  to  private  customers  or  to  bill 
brokers  or  stockbrokers,  and  the  discounts  and  advances 
that  it  makes  in  the  course  of  its  ordinary  banking  busi- 
ness at  its  branches  in  the  country.  It  will  thus  be  seen 
that  the  return  in  this  respect  is  far  from  informing,  and 
it  is  contended,  not  without  reason,  that  the  Bank  of 
England  might  well  set  an  example  of  clearness  in  the 
account  which  it  presents  by  separating  its  loans,  its  dis- 
counts, and  its  holding  of  securities  as  investments. 

It  may  perhaps  also  be  added  while  we  are  on  this 
subject  of  suggested  improvements  in  the  Bank  of  Eng- 

74 


The    English     Banking     System 

land's  return,  that  it  has  been  frequently  suggested  that 
the  bankers'  balances  should  be  separated  from  the  other 
items  included  in  the  other  deposits.  It  is  unlikely, 
however,  that  this  suggestion  will  be  revived  among  the 
other  bankers,  who  were  its  most  important  advocates, 
because  it  has  been  borne  in  upon  them  that  if  this  reform 
were  carried  out  the  willingness  of  the  Bank  of  England 
to  lend  money  at  times  when  emergency  credit  is  required 
might  be  very  seriously  modified.  There  can  be  no  doubt 
that  at  the  end  of  the  half-year,  when  the  Bank  of  England 
frequently  adds  15  or  20  miUions  to  the  amount  of  the 
bankers'  balances,  by  the  loans  which  it  makes  to  the  bill 
brokers  and  others  who  place  the  credit  so  created  to  the 
account  of  their  bankers  at  the  Bank  of  England,  these 
bankers'  balances  must  be  raised  to  a  level  which  is  con- 
siderably above  that  of  the  Bank  of  England's  reserve; 
and  it  seems  more  than  probable  that  if  the  amount  of  the 
bankers'  balances  were  separately  published,  the  Bank  of 
England  might  be  unwilling  to  allow  this  process  to  be 
indulged  in  with  the  same  freedom. 

If  this  were  so,  the  whole  mechanism  of  the  London 
money  market  would  be  modified  in  a  manner  which  its 
components  would  probably  find  inconvenient,  and  since 
this  aspect  of  the  case  has  been  recognized  the  agitation  in 
favor  of  the  separate  publication  of  the  bankers'  balances 
has  been  practically  dropped. 

The  last  two  items  among  the  assets  of  the  banking 
department  contain  what  is  usually  called  the  "Bank  of 
England's  reserve."  It  is  not  a  reserve  in  the  ordinary 
sense  of  the  word,  accumulated  profits  held  as  a  reserve 
fund.     That  we  find  among  the  liabilities  under  the  name 

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National    Monetary     Commission 

"rest."  When  reference  is  made  to  the  Bank  of  England's 
reserve,  what  is  meant  is  its  holding  of  cash  in  the  banking 
department.  This  cash  consists  very  largely  of  the  Bank 
of  England's  notes  issued  by  the  issue  department.  It 
will  be  observed  that  in  the  return  before  us  the  notes 
issued,  the  liability  of  the  issue  department,  amount  to 
nearly  56  millions,  while  the  notes  held  by  the  Bank  in 
the  banking  department  amount  to  27 J  millions.  Sub- 
tracting one  item  from  the  other,  we  find  that  some  28f 
millions  was  the  amount  of  the  Bank's  actual  note  circu- 
lation. It  thus  appears  that  a  very  large  proportion  of 
the  cash  held  by  the  Bank  of  England  to  meet  demands 
upon  it  consists  of  the  liabilities  of  its  issue  department, 
and  the  system  of  treating  a  liability  as  an  asset,  which 
has  been  academically  criticised  above  in  the  case  of  the 
Scottish  banks,  is  thus  practiced  by  the  Bank  of  England. 
But  there  is  this  important  difference  between  the  two 
cases.  The  Scottish  banks,  as  was  shown  by  the  evidence 
of  their  own  representatives,  take  advantage  of  their  note- 
issuing  privilege  to  economize  metal  to  the  extent  of  8  or 
10  millions.  And  so  it  follows  that  their  holding  of  actual 
cash  is  decidedly  low  when  compared  with  their  liabilities 
against  notes  and  deposits.  The  Bank  of  England,  on  the 
other  hand,  habitually  holds  a  very  high  proportion  of 
cash.  In  the  return  given  above  its  liability  on  notes  out- 
standing is  £28,672,000,  taking  the  notes  issued  less  those 
held  by  the  banking  department  as  an  asset,  and  its 
liabilities  on  public  and  other  deposits  and  seven-day 
and  other  bills  come  to  £57,170,000,  making  a  total  of 
£85,842,000.  Against  these  liabilities  it  holds  in  its  two 
departments  £39,172,000  in  coin  and  bullion,  the  propor- 

76 


The    English     Banking     System 

tion  being  thus  over  45  per  cent.  In  the  case  both  of  the 
Scotch  banks  and  of  the  Bank  of  England  the  cash  held 
against  notes  is  regulated  by  law,  and  above  a  certain 
limit  each  note  issued  must  be  represented  by  bullion. 
But  the  Scotch  banks  have  developed  deposit  banking 
facilities  to  an  extent  which  has  made  their  total  cash 
holding  small  in  proportion  to  their  total  liabilities  on 
notes  and  deposits,  while  the  Bank  of  England,  owing  to 
the  high  proportion  that  it  maintains  against  the  liabilities 
of  its  ordinary  banking  business,  still  shows  in  the  return 
given  45  per  cent  of  cash  against  its  notes  outstanding 
and  its  liability  on  deposit  and  drafts,  which  compares 
very  favorably  with  the  proportion  that  we  found  in  the 
hands  of  the  Scotch  banks. 

At  the  same  time,  though,  as  compared  with  Scotch 
practice,  the  Bank  of  England's  ideal  is  a  high  one.  The 
fact  that  the  reserve  of  its  banking  department  (held 
against  the  liabilities  which  include  the  balances  of  the 
other  banks  which  are  an  important  part  of  the  basis  of 
English  credit)  consists  largely  of  its  own  paper,  which  is 
based  to  the  extent  of  about  one-third  on  government 
debt  or  securities,  is  an  example  of  credit  based  on  credit 
that  is  sometimes  pointed  to  as  a  too  successful  extension 
of  the  economy  of  metal  which,  within  due  limits,  is  one 
of  the  most  important  functions  of  modern  banking. 
And  there  is  a  strong  feeling  among  the  English  banking 
community  that  the  Bank's  fiduciary  issue  should  be 
gradually  abolished,  and  that  the  Bank  of  England  note, 
which  is  now  held  largely  as  a  reserve  by  the  Bank  of 
England  and  the  other  banks,  also  has  become  part  of  the 


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National    Monetary     Commission 

basis  of  credit,  should  be,  actually  and  in  fact,  a  bullion 
certificate. 

The  amount  of  the  Bank  of  England's  reserve,  as  shown 
in  its  weekly  return,  is  an  item  of  the  utmost  importance 
to  those  who  have  to  forecast  the  condition  of  the  London 
money  market.  The  amount  of  the  reserve  is  now  rarely 
allowed  to  fall  below  20  millions,  though  there  are  many 
still  alive  who  can  remember  the  time  when  a  lo-million 
reserve  was  considered  an  adequate  amount.  When  gold 
is  taken  from  the  Bank,  it  follows  that  the  notes  issued 
against  it  by  the  issue  department  are  canceled,  and  thus 
the  amount  of  notes  held  among  the  assets  of  the  banking 
department  are  canceled  likewise.  The  export  of  gold 
so  immediately  reduces  the  reserve  of  the  banking  depart- 
ment and  lowers  the  proportion  between  it  and  the  Bank's 
liabilities  on  public  and  other  deposits  and  seven-day  bills. 
Both  the  amount  of  the  reserve  and  its  proportion  to  lia- 
bilities are  carefully  watched  by  the  bank  court,  and  any 
serious  reduction  in  them  is  met  by  measures  described 
above,  viz,  the  raising  of  its  official  rate,  accompanied,  if 
necessary,  by  the  borrowing  process  by  which,  as  has  been 
shown,  the  Bank  of  England  frequently  has  to  make  its 
rate  effective. 

(B)  THE  ENGLISH  JOINT  STOCK  BANKS. 

With  regard  to  the  provisions  laid  down  by  the  law  for 
the  organization  and  working  of  the  ordinary  English 
joint  stock  banks,  it  may  be  said  that,  except  with  regard 
to  note  issue  and  one  or  two  quite  unimportant  details, 
no  special  provisions  are  made;  and  it  has  already  been 
shown  that  the  note  issues  of  the  English  banks,  apart 

78 


The    English     Banking     System 

from  the  Bank  of  England,  are  now  a  quite  negligible 
quantity,  averaging  something  under  half  a  million;  and 
since  no  joint  stock  bank  with  an  office  in  London  can 
possess  the  right  of  note  issue,  it  follows  that  all  the  great 
English  banks,  which  necessarily  from  their  position 
must  have  an  office  in  London,  are  debarred  altogether 
from  note  issuing.  Nevertheless,  for  the  sake  of  com- 
pleteness, it  would  be  as  well  to  state  the  nature  of  the 
restrictions  upon  the  right  of  note  issue  which  govern 
those  of  the  few  country  joint  stock  banks  which  still 
maintain  them. 

By  the  act  of  1844  it  was  laid  down  that  no  banking 
company  in  England  which  did  not  then  possess  the  right 
of  issue  could  acquire  it,  and  that  those  which  then  exer- 
cised it  could  not  under  any  circumstances  increase  their 
note  issue  above  the  limit  laid  down  by  the  act,  which 
was  based  on  the  average  of  its  circulation  during  the 
twelve  weeks  preceding  the  27th  of  April,  1844.  The 
right  of  issue  might  only  be  exercised  outside  a  circle 
drawn  around  London  with  a  radius  of  65  miles,  within 
which  the  Bank  of  England's  monopoly  was  protected 
against  competition  by  other  joint  stock  companies. 

In  order  to  exercise  the  privilege,  a  bank  must  annually 
take  out  a  license  subject  to  a  duty  of  £30,  a  separate 
license  being  necessary  for  every  place  at  which  notes 
are  issued.  In  respect  of  the  note  issue,  the  law  thus 
laid  down  an  absolute  limit  upon  English  banking,  and 
also  made  strict  regulations  for  the  presentation  of  re- 
turns showing  that  it  had  not  been  exceeded.  The  bank 
charter  act  provides  that  a  weekly  return  shall  be  sent 
to   the  commissioners   of   stamps   and   taxes,   giving   an 

76651 — 10 6  79 


National     Monetary     Commission 

account  of  the  circulation  of  bank  notes  on  every  day 
during  the  previous  week,  and  also  the  average  amount 
of  the  circulation,  and  at  the  end  of  every  period  of  four 
weeks  an  average  circulation  during  the  four  weeks  is  to 
be  stated,  and  also  the  amount  of  notes  which  the  Bank 
is  authorized  to  issue  under  the  act. 

These  returns  were  to  be  published  by  the  commission- 
ers in  the  London  Gazette,  and  though,  owing  to  the 
supersession  of  the  note  by  the  check,  they  have  no 
practical  value  as  a  statement  of  English  currency  move- 
ments, these  returns  do  still  make  their  appearance  in 
the  Gazette,  an  official  publication  which  is  read  only  by 
those  in  search  of  curious  information.  It  may  be  added 
that  any  neglect  of  the  duty  of  presenting  this  return  to 
the  commissioners,  or  any  falsification  of  the  accounts, 
render  the  Bank  Hable  to  a  fine  of  £ioo.  Under  the  act 
the  commissioners  have  the  right  to  inspect  the  books  of 
the  noteissuing  banks,  but  this  right  does  not  appear  to 
have  ever  been  exercised. 

Before  leaving  the  subject  of  notes,  we  may  add  that 
the  limitation  of  liability  on  bank  shares  does  not  apply 
to  the  liability  under  notes.  But  here  again,  owing  to 
the  insignificant  dimensions  of  the  note  issue  of  the 
English  banks,  this  provision  is  of  no  importance.  Under 
the  provisions  of  the  joint  stock  companies  acts,  which 
apply  to  all  joint  stock  companies  as  such,  the  English 
joint  stock  banks  have  to  furnish  to  the  registrar  of 
joint  stock  companies  an  annual  list  of  shareholders  in 
the  company,  with  their  names,  addresses,  and  occupa- 
tions, and  the  number  of  shares  held  by  them.  A  bank- 
ing   company    must    add    to    this    list    a    statement   of 

80 


The    English     Banking    System 

the  names  of  the  several  places  in  which  it  carries  on 
business.  The  register  of  members  is  to  be  kept  at  the 
registered  office  of  the  company,  and  any  shareholders 
in  a  joint  stock  bank  can  claim  to  inspect  the  list  during 
business  hours. 

A  special  provision  with  regard  to  the  purchase  and  sale 
of  bank  shares  on  the  stock  exchange  was  laid  down  by  a 
statute,  commonly  known  as  Leeman's  Act,  which  pro- 
vides that  all  contracts  and  claims  for  sale  and  purchase 
in  the  shares  of  joint  stock  banking  companies  shall  be 
null  and  void  unless  they  shall  set  forth  the  numbers  of 
the  shares  transferred.  The  object  of  this  provision  was 
to  prevent  attacks  on  the  credit  of  banks,  which  might  have 
serious  results  from  the  public  point  of  view,  by  means  of 
bear  sales  on  the  stock  exchange.  Its  practical  result  was 
that  nobody  could  sell  a  bank  share  unless  be  possessed 
them  or  could  borrow  them  from  some  actual  holder,  and 
so  was  able  to  give  the  numbers  of  the  shares  at  the  time 
when  the  sale  was  effected ;  and  it  was  thus  made  impossible 
by  means  of  fictitious  sales,  with  a  view  to  repurchase 
before  the  completion  of  the  bargain,  to  give  any  appear- 
ance of  weakness  to  the  position  of  a  bank. 

With  regard  to  the  liability  of  directors  and  officers,  the 
banks  are  again  subject  to  the  ordinary  law  of  joint  stock 
companies.  Under  this  law  it  is  permitted  to  companies 
to  provide  under  their  memorandum  of  association  that 
the  liabihty  of  the  directors  shall  be  unlimited,  but  this 
provision  is  rarely,  if  ever,  made  use  of.  The  directors  of 
a  company,  being  to  all  intents  and  purposes  a  specially 
elected  committee  of  shareholders  appointed  to  manage 
its  affairs  in  the  interests  of  the  company  as  a  whole,  thus 

8i 


National    Monetary     Commission 

undertake  certain  duties  and  responsibilities  to  which  the 
law  expects  them  to  apply  reasonable  diligence  and  care. 
They  are  bound  to  account  to  the  company  for  all  profits, 
and  are  responsible  for  any  losses  that  may  be  incurred  by 
their  acting  ultra  vires,  or  by  their  willful  misconduct,  or 
by  negligence.  Innocent  mistake  does  not  appear  to  ren- 
der them  liable,  and  they  are  entitled  to  place  a  reasonable 
amount  of  confidence  in  the  officers  of  the  company. 

In  the  course  of  giving  judgment  on  a  case  which  is 
quoted  by  Dr.  Heber  Hart  in  his  work  on  the  law  of 
banking,  Dovey  v.  Cory,  the  Lord  Chancellor  made  a 
statement  containing  the  following  remarks: 

"The  charge  of  neglect  appears  to  rest  on  the  assertion 
that  Mr.  Cory  like  the  other  directors  did  not  attend  to 
any  details  of  business  not  brought  before  them  by  the 
general  manager  or  the  chairman,  and  the  argument 
raises  a  serious  question  as  to  the  responsibility  of  all 
persons  holding  positions  like  that  of  directors,  how  far 
they  are  called  upon  to  distrust  and  be  on  their  guard 
against  the  possibility  of  fraud  being  committed  by 
their  subordinates  of  every  degree.  It  is  obvious  if 
there  is  such  a  duty  it  must  render  anything  like  an 
intelligent  devolution  of  labor  impossible.  Was  Mr. 
Cory  to  turn  himself  into  an  auditor,  a  managing  direc- 
tor, a  chairman,  and  find  out  whether  managers,  audi- 
tors, and  directors  were  all  alike  deceiving  him?  I  can 
not  think  that  it  could  be  expected  of  a  director  that  he 
should  be  watching  either  the  inferior  officers  of  the 
bank  or  verifying  the  calculations  of  the  auditor  him- 
self. The  business  of  life  could  not  go  on  if  people  could 
not  trust  those  who  are  put  into  a  position  of  trust  for  the 


82 


The    English     Banking     System 

express  purpose  of  attending  to  details  of  management. 
If  Mr.  Cory  was  deceived  by  his  own  officers  there  ap- 
pears to  me  to  be  no  case  against  him  a^"  all.  The  pro- 
vision made  for  bad  debts,  it  is  well  said,  was  inadequate, 
but  those  who  assured  him  that  it  was  adequate  were  the 
very  persons  who  were  to  attend  to  that  part  of  the  busi- 
ness, and  so  of  the  rest." 

At  the  same  time  the  law  appears  to  lay  down  that  the 
trust  reposed  by  directors  in  others  must  not  be  blind  or 
unqualified  or  to  the  exclusion  of  the  exercise  of  their  own 
judgment,  and  they  are  bound  to  fulfill  the  regulations  of 
their  own  company. 

The  duties  and  liabilities  of  managers  are  left  in  a  simi- 
lar state  of  vagueness  as  far  as  the  law  is  concerned.  Like 
the  directors  the  manager  has  to  account  to  the  company 
for  any  profits  that  may  accrue  to  him  in  connection  with 
his  position,  that  is  to  say,  he  must  not  conduct  business 
on  his  own  account  and  keep  the  profits  for  himself,  and 
he  is  of  course  expected  to  use  reasonable  diligence  and 
care. 

In  a  case  in  which  a  bank  manager  had  obtained  a  com- 
mission for  bringing  about  the  amalgamation  of  two  banks, 
it  was  stated  in  the  course  of  the  judgment  that  since  he 
was  a  manager,  bound  to  consult  the  shareholders' 
interests  only,  he  could  not  retain  a  pecuniary  benefit 
obtained  by  him  in  his  character  of  manager  not  known 
to  and  not  sanctioned  by  the  shareholders  who  employed 
him. 

It  has  been  shown  above  that  special  regulations  were 
made  for  the  periodical  publication  of  the  liabilities  of 
joint-stock   banking   companies   under   their   note   issue. 


83 


National     Monetary     Commission 

Apart  from  this,  the  statements  of  accounts  which  banking 
companies  have  to  produce  are,  with  one  unimportant 
exception,  merely  those  laid  down  by  the  joint  stock  com- 
panies acts;  that  is  to  "say,  once  a  year  the  accounts  of 
every  banking  company  have  to  be  examined  by  an 
auditor  or  auditors.  The  auditors  have  to  be  elected  by 
the  shareholders  once  a  year,  and  have  access  to  the  books 
and  accounts  of  the  company  at  all  reasonable  times.  In 
the  case  of  a  banking  company,  an  investigation  into  the 
company's  position  may  be  ordered  by  the  board  of  trade 
on  the  application  of  not  less  than  one-third  of  the  share- 
holders. 

A  special  form  of  statement  of  capital,  liabilities,  and 
assets  for  banking  and  similar  companies  was  laid  down 
by  the  companies  act  of  1862.  It  provided  that  every 
limited  banking  company  and  every  insurance  company 
and  deposit,  provident,  or  benefit  society  under  the  act 
should,  on  the  first  Monday  in  February  and  the  first 
Monday  in  August  in  every  year,  make  and  put  up  in  a 
conspicuous  place  in  every  office  in  which  it  carries  on 
business  a  statement  showing  the  capital  of  the  company, 
authorized,  issued,  and  paid  up,  and  also  a  statement  of 
assets  and  liabilities  of  the  company  on  the  first  day  of 
the  preceding  month,  drawn  up  in  the  following  form: 
Debts  owing  to  sundry  persons  by  the  company— 

On  judgment. 

On  specialty. 

On  notes  or  bills. 

On  simple  contract. 

On  estimated  liabilities. 
The  assets  being  divided  into — 

84 


The     English     Banking     System 

Government  securities. 

Bills  of  exchange  and  promissory  notes. 

Cash  at  the  bankers. 

Other  securities. 
This  is  the  only  form  in  which  publicity  is  imposed  by 
law  upon  banking  in  the  ordinary  sense  of  the  word  as  it  is 
now  understood  in  England.  It  need  hardly  be  said  that 
from  the  form  of  the  statement  it  conveys  absolutely 
nothing  to  the  ordinary  member  of  the  public,  and  these 
statutory  statements,  though  they  are  still  put  up  by  the 
banks  in  their  offices,  with  more  or  less  modification  from 
the  original  form,  are  perhaps  the  only  statements  issued 
by  them  to  which  no  attention  whatever  is  ever  paid.  Cus- 
tom has  made  the  banks  publish  the  accounts  and  balance 
sheets  which  the  law  only  compels  them  to  lay  before  their 
shareholders  in  general  meeting.  Appended  is  a  specimen 
of  the  balance  sheet  and  profit  and  loss  account  of  the 
Union  of  London  and  Smiths  Bank,  which  is  selected  by 
reason  of  the  fact  that  it  presents  its  position  with  unusual 
detail. 

THE    UNION    OP    LONDON    &    SMITHS    BANK  (LIMITED). 

Statement  of  accounts  for  the  half  year  ending  December  ji,  1908 

General  Balance. 

liabilities. 

£  s.    d. 

Capital  subscribed,  £22,934,100,  in  229,341  shares  of 

£100  each;  paid  up,  £15  los.  per  share 3.554>785   10     o 

Reserve  fund  invested  in  consols,  local  loans  stock,  and 
Transvaal  government  3  per  cent  guaranteed  stock, 

as  per  contra 1,150,000    o    o 

£  s.    d. 

Current  accounts 25,116,492   19     4 

Deposit  accounts 10,759,370     8     o 

35,875,«63     7     4 

85 


National     Monetary     Commission 

£       s.   d. 

Acceptances  and  guaranties 3,461,362     2     i 

Liabilities  by  indorsement  on  foreign  bills  sold 24,  268   11     7 

Other  liabilities,   being  interest  due  on  deposits,   un- 
claimed dividends,  etc 563,352      I    II 

Rebate  on  bills  not  due 29,077     5   11 

Profit  and  loss —  £         s.    d. 

Balance  brought  forward 193,839  17     7 

Net  profit  for  the  half  year  ending 

December  31,  1908 174.507     6     3 

— 368,347     3   10 


45,027,056     2     8 


ASSETS. 


Cash  in  hand 3-353.635    6 

Cash  in  Bank  of  England 3,528,438   12 


52,073   19     o 


Money  at  call  and  at  short  notice 6,  933,  965 

Investments: 

Securities  of  and  guaranteed  by 

the  British  Government 2,939,312     7   11 

India  stock  and  Indian  Rail- 
ways guaranteed  bonds 313,098     6  10 

English  corporation  stocks,  rail- 
way and  waterworks  deben- 
ture and  preference  stocks, 
colonial  stocks,  foreign  gov- 
ernment and  railway  deben- 
ture bonds -_   1,748,753     4     8 

Other  investments 94,915   13     o 


5,096,079   12 
Reserve     fund     (£567,000     consols; 
£515,500  local  loans  stock;  £207,- 
600  Transvaal  government  3   per 
cent  guaranteed  stock) 1,150,  000     o 


6,  246,  079   i: 


Bills  discounted: 

(a)  Three  months  and  under 3,978,249   15     i 

(6)  Exceeding  three  months 450,511   13     9 

4,428,761     8   10 

Loans  and  advances 15.456.759  15     i 

Liabilities  of  customers  on  acceptances  and  guaranties, 

as  per  contra 3,461,362     2      i 

Liabilities  of  customers  for  indorsements,  as  per  contra.  24,  268  11     7 

Bank  premises,  chiefly  freehold  (at  cost  or  under) 1,455,879     4     i 

Other  assets,  being  interest  due  on  investments,  etc 137,  906     7     7 

45,027,056     2     8 
86 


The     English     Banking     System 

Profit  and  Loss  Account. 

£         s.   d. 

Interest  allowed  to  customers 171,  864     6     6 

Salaries,  contributions  to  pension  fund,  and  other  expenses 

at  head  office  and  branches 215,749     4     9 

Rebate  on  bills  not  due 29,077     5   11 

Dividend  on  229,341  shares  at  15s.  6d.  per 
share,  equal  to  a  rate  of  10  per  cent  per        £         s.    d. 

annum i77,  739     5     6 

Balance,  being  undivided  profit  carried  for- 
ward to  the  next  half  year 190,607   18     4 

368, 347     3   10 

785,038      I     o 

Profit  unappropriated  on  June  30,  1908 193.839   17     7 

Gross  profit  for  the  half  year  ending  December  31,  1908, 
after  making  provision  for  all  bad  and  doubtful  debts  and 
payment  of  income  tax 591,198     3     5 

785,038      I      o 
Felix  Schuster,  Governor, 
John  Trotter,  Deputy  Governor, 
Henry  J.  B.  Kendall, 

Directors. 
J.  E.  W.  Moulding,  Manager. 
C.  H.  R.  Weidemann,  Chief  Accountant. 


REPORT  op  the  auditors  TO  THE  SHAREHOLDERS  OF  THE  UNION  OF  LON- 
DON &  SMITHS  BANK  (LIMITED). 

We  have  audited  the  above  balance  sheet  with  the  books  at  the  head 
office  and  with  the  returns  from  the  branches.  We  have  satisfied  ourselves 
as  to  the  correctness  of  the  cash  and  have  verified  the  investments  held 
by  the  bank,  the  securities  held  against  money  at  call  and  short  notice 
and  the  bills  discounted.  We  have  obtained  all  the  information  and  ex- 
planations we  have  required.  In  our  opinion  such  balance  sheet  is  properly 
drawn  up  so  as  to  exhibit  a  true  and  correct  view  of  the  state  of  the  com- 
pany's affairs  according  to  the  best  of  our  information  and  the  explana- 
tions given  to  us  and  as  shown  by  the  books  of  the  company. 

Wm.  B.  Peat, 
C.  W.  M.  Kemp, 
Arthur  F.  Whinney, 

Auditors. 

It  will  be  observed  that  the  above  balance  sheet  shows 
the  bank's  deposit  and  current  accounts  separately  stated, 

87 


National     Monetary     Commission 

whereas  the  other  joint  stock  banks  put  them  together  in 
one  item.  It  also  states  separately  cash  in  hand  and  cash 
at  the  Bank  of  England,  though  its  competitors  give  them 
also  in  one  item.  It  separates  its  loans  and  advances  from 
its  bills  discounted,  though  many,  but  not  all,  of  the  other 
joint  stock  banks  put  these  items  together.  Many  of  the 
country  banks  do  not  even  show  a  separate  statement  of 
their  cash  in  hand.  In  the  appended  specimen  of  a  north 
country  bank's  balance  sheet  it  will  be  observed  that  the 
cash  in  hand  is  included  with  the  cash  at  call  and  short 
notice,  that  is  to  say,  cash  that  has  been  loaned,  and, 
though  probably  easily  recalled  if  required,  is  not  actually 
in  the  bank's  possession. 

LIABILITIES. 

£  S.    d. 

Capital 300,000     o     o 

Reserve  fund 305,000     o     o 

Notes  in  circulation 5.520     o     o 

Unpaid  dividends 204     5     o 

Amount  due  by  the  bank  on  current  accounts,  deposits, 

drafts  on  London  agents,  etc 3.837,794     9     3 

Rebate  on  bills  and  interest  on  deposits 11,838  14  10 

£       s.   d. 

Balance  of  profit  and  loss  account 39.738   16     4 

Less  interim  dividend  paid  in  August  last-    15,000     o     o 

24,738   16     4 

4,485,096     5     5 

ASSETS. 

£  s.     d. 

Cash  on  hand,  at  call,  and  at  short  notice 815,846   12     o 

£         s.  d. 

£250,000  consols 207,500     o     o 

Other  British  government  securities 215,660     7     6 

Colonial    government,    English    railway 

debenture,  and  other  stocks 381,  099  10     7 

804,  259  18     I 


88 


The    English     Banking     System 


£         s.  d. 

Bills  on  hand 657,423   12  2 

Advances  on  current  accounts,  loans,  etc 2,165,566     3  2 

Bank  premises  at  Halifax  and  branches 42,000     o  o 

4,485,096     5     5 

Custom  has  also  induced  many  of  the  chief  joint  stock 
banks  to  issue  a  monthly  statement  of  assets  and  liabili- 
ties, which  is  more  or  less  based  upon  the  statutory  form 
referred  to  above,  though  amplified  and  made  to  some 
extent  more  informing. 

Appended  is  a  summary  and  analysis  of  all  these  state- 
ments taken  from  the  Times  newspaper  in  the  form  in 
which  it  publishes  them  once  a  month.  These  statements 
give  the  position  of  the  various  banks  on  one  day  at  the 
end  of  each  month.  The  day  in  question  is  chosen  by 
each  of  the  banks,  and  the  dates  on  which  they  make  up 
their  statements  range  over  the  last  week  or  ten  days  of 
each  month. 

Banks'  monthly  statement. a 


I. 

2. 

3. 

4. 

5. 

6. 

Bank. 

Deposits, 
etc. 

Accept- 
ances, 
etc. 

Cash  in 
hand  and 

at  Bank 

of 
England. 

Cash  at 
call  and 
notice. 

Pro- 
por- 
tion 

of 
col- 
umn 
3  to 
col- 
umn 

I. 

Pro- 
por- 
tion 

of 
col- 
umn 
3  to 
col- 
umns 
I  and 

2. 

£ 

£ 

£ 

£ 

P.ct. 

P.ct. 

Capital  and  Counties 

35.395.302 

557.524 

S.51S.924 

7,  241.053 

15.6 

iS-3 

Lloyds  - 

72.443.932 
28. S07, 780 

3,662.597 
I,  400,358 

12, 187, 917 
3,566.847 

6, 265,454 
S.301.91S 

i6  8 

London  Joint  Stock 

12. 5 

II. 9 

London  and  County 

43,866,938 

3. 153.873 

6,868.436 

3, 666, 969 

15-7 

14.  6 

7.033.194 

London  City  and  Mid- 

land  

64.850,909 

4, 944. 508 

10.753. 256 

7, 610, 117 

16.6 

15.4 

o  Published  in  the  Times  of  March  16,  1909,  showing  the  position  of  the  banks  at  the 
end  of  February. 

89 


National     Mo  dietary     Commission 


Banks'  monthly  statement — Continued. 


Bank. 


London  and  Southwest- 
ern  

London  and  Westmin- 
ster  

National 

National  Provincial 

Parr's 

Union  of  London  and 

Smith's 

Williams  Deacon 

Total 

A  year  ago 


Deposits, 
etc. 


14, S9I. 267 

22,346.851 
12, S03, 210 
57.  294,363 
29. S90, 810 

34,465.600 
13.301, 799 


429, 158, 771 
397.312.472 


Accept- 
ances, 
etc. 


£ 

27. 770 

1,282,  281 

1.396,937 

721, 113 

2,863, 163 

3,503,806 
662, 925 


24, 176,855 
24, 685, 002 


Cash  in 
hand  and 

at  Bank 

of 
England. 


£ 
2. 174.837 

2, 901, 403 
1.710,515 
9.  134.694 
4,  846,  446 

5,565, 248 
2.  134. 745 


Cash  at 
call  and 
notice. 


£ 
I. 417. 330 

s.  275.375 

2, 004, 880 
4, 006, 461 
4.826,38s 

6.542,785 
I, 062, 424 


67,  360,  2685  5,  221,  148 
61,639,802  45,  795.482 


Pro- 
por- 
tion 
of 
col- 
umn 
3  to 
col- 
umn 


6. 

Pro- 
por- 
tion 
of 
col- 
umn 
3  to 
col- 
umns 
I  and 


P.cl.    P.ct. 
14.9]      14.9 


13 

0 

12 

3 

13 

7 

13 

3 

IS 

9 

IS 

7 

16 

4 

14 

9 

16 

I 

14 

7 

i6 

0 

15 

3 

15 

7 

14 

9 

IS 

S 

14 

6 

It  is  well  known  that  some  of  the  banks  call  in  loans  or 
allow  bills  to  mature  without  renewing  them,  in  order  to 
show  a  reasonable  proportion  of  cash  in  hand  in  these  state- 
ments, and  in  so  far  as  this  practice  is  carried  out,  the  state- 
ments are  obviously  misleading,  since  they  do  not  show 
what  the  position  of  the  bank  has  been  during  the  month 
covered,  but  only  upon  a  certain  day  in  it.  And  since  they 
are  not  all  made  up  on  the  same  day,  it  is  thus  possible  for 
cash  to  be  called  in  by  one  bank  for  one  day,  released  by  it 
the  next  day,  and  passed  on  to  figure  in  the  statement  of  a 
competitor;  and  the  system,  which  was  inaugurated  at  the 
request  of  Lord  Goschen  after  the  crisis  of  1890  in  order  to 
insure  the  greater  publicity  which  he  saw  to  be  necessary, 
has  thus  led  to  a  certain  amount  of  abuse,  and  the  practice 


90 


The    English     Banking     System 

of  what  is  commonly  spoken  of  in  Lombard  street  as  "win- 
dow dressing." 

It  is  commonly  urged  that  these  statements  would  be 
much  more  valuable  and  give  a  much  truer  idea  of  the 
position  of  the  several  banks  if  they  showed  the  position, 
not  on  any  one  day,  but  gave  the  average  figures  for  the 
preceding  period.  It  is,  however,  very  difficult  to  bring 
about  reform  in  this  matter,  because  the  banks  which 
publish  these  periodical  statements  naturally  retort  that 
they  see  no  reason  why  they  should  give  further  publicity 
as  long  as  many  of  their  competitors  issue  no  such  state- 
ments at  all. 

None  of  the  private  banks  make  these  periodical  state- 
ments, and  a  great  amalgamation  of  them  which  was 
converted  into  a  joint  stock  company  in  1894  has  not 
joined  the  ranks  of  those  which  produce  monthly  state- 
ments. So  far  the  only  effect  of  the  agitation  has  been 
that  the  London  and  County  Bank  publishes  the  daily 
average  of  its  cash  holding,  as  well  as  its  cash  holding  on 
the  day  on  which  the  statement  was  made  up,  and  it 
seems  unlikely  that  anything  further  will  be  done  until  all 
the  other  banks  in  England  have  been  induced  to  agree  to 
give  a  similar  amount  of  publicity. 

The  specimen  of  a  country  bank  balance  sheet  given 
above  shows  that  even  at  the  end  of  the  half  years  when 
all  joint  stock  companies  do  make  a  public  statement,  the 
important  item  of  cash  in  hand  is  not  separately  given. 
There  is  only  too  good  reason  to  believe  that  the  many 
country  banks  which  thus  conceal  the  most  important 
item  in  their  position  make  use  of  this  concealment  to 
work  on  an  extremely  narrow  cash  basis.     The  following 

91 


National    Monetary     Commission 

statement  was  made  by  a  president  of  the  Bankers'  Insti- 
tute who,  as  chairman  of  the  largest  joint  stock  bank  in 
England,  may  be  taken  to  have  had  exceptional  oppor- 
tunities for  the  exploration  of  banking  accounts.  He 
spoke  as  follows: 

"  I  may  add  that  a  joint  stock  bank  which  came  into  our 
fold  some  years  ago,  whose  reputation  and  position  were 
second  to  none  in  the  Kingdom,  and  justly  so,  too,  and 
was  a  model  of  good  management  in  other  respects,  em- 
ployed every  farthing  they  possessed,  save  and  except 
what  they  required  for  till  money,  up  to  the  hilt  every 
day;  feeling  sure  that  by  means  of  their  investments, 
which  were  gilt-edged  though  not  consols,  they  would 
always  be  helped  over  the  stile  if  pressure  came.  And 
that,  I  may  say,  is  not  an  exceptional  case." 

It  follows  from  this  state  of  things,  under  which  country 
banks,  competing  keenly  in  the  provinces  with  the 
branches  of  the  great  London  institutions,  keep  practically 
no  cash  reserves  at  all,  that  the  agitation  for  more  com- 
plete and  genuine  publicity  on  the  part  of  the  great  Lon- 
don banks  is  to  some  extent  unfair,  and  that  reform,  if 
any  could  ever  be  carried  out,  should  first  apply  itself  to 
compelling  all  the  banks  to  make  clearer  periodical  state- 
ments. In  this  matter  the  law  might  well  intervene  by 
insuring  due  publicity  and  uniform  statements  from  all 
banks  in  England.  In  other  respects  its  regulations 
might  very  probably  be  harmful,  but  it  could  not  be  ask- 
ing too  much  from  the  banks  if  it  compelled  them  to  show 
periodically  genuine  statements  of  their  position,  giving 
the  averages  of  the  period  covered,  as  is  done  by  the  New' 
York  banks. 

92 


The    English     Banking     System 

With  regard  to  the  habiHty  of  shareholders,  the  law 
again  makes  no  definite  regulation,  but  it  is  the  general 
custom  for  English  joint  stock  companies  to  have  a  com- 
paratively small  amount  of  their  capital  actually  paid  up, 
so  that  there  is  a  heavy  reserve  liability  which  can  be  called 
in  in  case  of  liquidation.  All  the  chief  joint  stock  banks 
are  now  registered  under  limited  liability.  Since  the  re- 
serve liability  involved  by  the  fact  that  only  a  small  pro- 
portion of  their  shares  is  paid  up  is  an  important  item  in 
their  credit,  it  follows  that  the  directors  of  banking  com- 
panies exercise  a  considerable  amount  of  care  concerning 
the  persons  into  whose  names  their  shares  are  transferred. 
They  have  the  right  to  refuse  transfers  of  shares  into  the 
names  of  persons  of  whose  financial  ability  to  meet  the 
liability  in  case  of  need  they  are  not  sufficiently  assured, 
and  this  right  is  frequently  exercised. 

It  will  be  observed  that  the  above  regulations  make  no 
provision  with  regard  to  capital  and  reserve  funds,  the 
amount  of  which  is  left  entirely  to  the  discretion  of  those 
responsible  for  the  bank's  affairs,  and  that  there  is  no  pro- 
vision for  any  inspection,  supervision,  or  examination  by 
government  officials,  except  in  the  case  of  those  country 
banks  which  still  retain  the  right  of  note  issue. 

(C)  THE  PRIVATE  BANKS. 

Proceeding  to  the  private  firms,  we  find  that  as  far  as 
they  are  concerned  the  law  has  practically  nothing  to  say, 
always  excepting  the  case  of  those  few  country  institu- 
tions which  retain  the  right  of  note  circulation,  with  regard 
to  which  the  regulations  are  the  same  as  those  enumer- 
ated for  the  joint  stock  companies.     Private  firms  have 


93 


National    Monetary     Commission 

to  make  a  statement  to  the  Government  of  the  names 
and  addresses  of  their  partners.  The  number  of  their 
partners,  which  was  not  to  be  more  than  six  at  the  time  of 
the  Bank  of  England's  original  charter,  has  now  been  raised 
to  a  possible  ten.  Above  that  number  they  have  to  reg- 
ister as  joint  stock  companies.  There  is  no  provision  of 
any  kind  for  any  statement  of  their  assets  and  liabilities, 
and  though  most  of  them  do,  in  fact,  publish  half-yearly 
or  yearly  balance  sheets,  there  are  still  one  or  two  private 
banking  institutions  which  never  make  public  any  state- 
ment whatever  concerning  their  position.  Appended  is  a 
balance  sheet  of  a  leading  private  banking  firm : 

Forty-ninth  statement  of  assets  and  liabilities  of  Glyn,  Mills,  Currie  &  Co., 
December  ji,  igoS. 

LIABILITIES. 

£  s.  d. 

To  capital  paid  up 1,000,000  o  o 

To  reserve  fund «». 500,000  o  o 

To  current  accounts 10,750,630  13  10 

To  deposit  accounts 4)550>  465  1 4  9 

To  reduction  of  the  bank  premises  account 41,847  8  7 

Memorandum. 

Liabilitieson  account  of  acceptances, 
indorsements,  etc.  (covered  by 
securities),  not  included  in  balance  £  s.    d. 

sheet 1,218,544     8     7 

16,842,943   17     2 

ASSETS. 

£  s.  d. 

By  cash  in  hand  and  at  Bank  of  England 2,064,020     2     o 

By  money  at  call  and  at  short  notice 5.251,750     o     o 

By  investments: 

Two-and-a-half   per  cent   con-  £  s.    d. 

sols  (£1,219,513  at  82) 1,000,000     o     o 


94 


The    English    Banking    System 


By  investments — Continued. 

Transvaal   Government    3    per 
cent  stock  (£537,635  at  93)-. 


£ 

s. 

d. 

500, 000 

0 

0 

1 , 500, 000 

0 

0 

1.049.757 

15 

4 

Securities  of,  or  guaranteed  by, 
the  British  Government 

Government  of  India  and  co- 
lonial government  securities.         95,  121     o     o  £  s.     d. 


2,644,878   15     4 

By  bills  discounted,  loans,  and  other  securities 6,512,294  19   10 

By  bank  premises  (freehold) 370,000     o     o 

16,842,943   17     2 
L.   CURRIE, 
M.  G.  C,  Glyn, 

Managing    Partners. 
January  ii,  1909. 

Auditor's  Certificate  and  Report. 

In  accordance  with  the  provisions  of  subsection  2  of  section  19  of  the 
companies  act  1907,  I  report  that  1  have  examined  the  above  balance  sheet 
with  the  books  of  the  bank,  I  have  obtained  all  the  information  and  expla- 
nations I  have  required,  and  I  am  of  opinion  that  such  balance  sheet  is 
properly  drawn  up  so  as  to  exhibit  a  true  and  correct  view  of  the  state  of 
the  bank's  affairs  according  to  the  best  of  my  information  and  the  explana- 
tions given  to  me,  and  as  shown  by  the  books. 

C.  W.  M.  Kemp,  F.  C.  A., 

Public  Accountant. 

January  ii,  1909. 

(D)  THE  SCOTCH  BANKS. 

In  the  case  of  the  Scottish  banks  the  law  is  very  similar 
in  essence  to  that  which  governs  their  English  brethren. 
That  is  to  say,  it  has  laid  strict  and  important  regulations 
upon  the  note  issue,  and  has  left  the  other  important 
banking  functions  practically  to  the  discretion  of  the 
bankers.  But  since  all  the  great  Scottish  banks  possess 
the  right  of  note  issue,  and  regard  it  as  a  very  valuable 
asset,  whereas  in  the  case  of  the  English  banks  the  note 
issue  is  now  a  neghgible  part  of  the  banker's  function,  it 

76651—10 7  95 


National    Monetary    Commission 

will  be  seen  that  the  regulation  laid  down  by  the  law  is 
much  more  important  in  Scotland  than  in  England. 
These  regulations  were  largely  based  upon  the  principles 
which  dictated  Peel's  Act  of  1844  for  regulating  the  note 
circulation  of  the  Bank  of  England  and  of  the  English 
banks.  It  will  be  remembered  that  with  regard  to  English 
banking  Peel  laid  down  that  from  that  time  forward  no 
increase  in  the  Bank  of  England's  note  issue  could  be 
permitted  unless  backed  by  an  equivalent  amount  of 
bullion,  and  that  the  English  country  banks  should  under 
no  circumstances  whatever  be  permitted  to  increase  their 
circulation  of  notes.  In  Scotland,  since  there  was  no 
leading  institution  enjoying  any  monopoly,  the  regulation 
which  was  applied  to  the  Bank  of  England  was  applied 
to  all  the  bankers  as  a  whole.  That  is  to  say,  the  average 
amount  of  their  circulation  was  ascertained,  and  it  was 
laid  down  that  in  future  any  increase  in  that  amount  must 
be  backed  by  an  equivalent  amount  of  bullion.  It  natu- 
rally followed  from  the  terms  of  this  act  for  regulating 
Scottish  banking,  passed  in  1845,  that  any  new  bank 
thereafter  created  would  not  have  the  right  of  note  issue 
and  the  result  of  this  was  that  the  then  existing  banks 
were  given  what  amounted  to  a  joint  monopoly  of  the 
banking  field  in  Scotland. 

This  fact  has  no  doubt  to  some  extent  accounted  for  the 
completeness  with  which  the  Scottish  banks  have  been 
able  to  make  a  hard  and  fast  combination  among  them- 
selves with  regard  to  the  rates  at  which  they  are  prepared 
to  do  business  with  their  customers.  It  has  protected 
them  from  competition,  either  by  any  new  rival  who 
might  arise  or  by  any  English  bank  which  might  be  bold 

96 


The    English     Banking     System 

enough  to  cross  the  border.  It  is  not  for  a  moment  sug- 
gested that  the  Scottish  banks  have  in  any  way  abused 
the  joint  monopoly  which  was  thus  conferred  upon  them; 
it  is  only  implied  that  the  fact  of  this  monopoly  has 
enabled  them  to  work  together  in  a  manner  which  has 
been  found  quite  impossible  by  their  English  counterparts. 

To  proceed  to  the  details  of  the  act,  it  may  be  observed 
that  the  average  circulation  of  each  bank  was  arrived  at 
from  the  figures  for  the  year  preceding  the  ist  of  May, 
1845.  On  the  basis  of  these  figures  the  commissioners  of 
stamps  and  taxes  were  instructed  to  give  each  of  the  banks 
a  certificate  stating  the  amount  of  notes  which  they  might 
in  future  issue  without  holding  any  gold  or  silver  against 
it,  this  amount  being  called  the  authorized  circulation. 
Above  this  line  each  bank  must  hold  gold  or  silver  coin 
to  an  amount  equal  to  the  excess,  and  the  silver  was  not 
allowed  to  exceed  one-fourth  of  the  gold — that  is  to  say, 
one-fifth  of  the  total  bullion  held. 

The  excess  circulation  was  to  be  arrived  at  upon  an 
average  of  four  weeks.  Weekly  accounts  had  to  be 
rendered  to  the  commissioners  of  stamps  and  taxes  stating 
the  amount  of  notes  in  circulation  on  the  previous  Satur- 
day, the  gold  and  silver  coin  held  at  the  head  office  of  the 
bank  on  each  day  of  the  week  ending  on  the  same  Saturday, 
and  the  gold  and  silver  coin  held  at  the  close  of  business 
on  that  Saturday.  At  the  end  of  each  successive  period 
of  four  weeks  each  bank  had  to  show  the  average  amount 
of  circulation  during  the  four  weeks  and  the  average 
amounts  of  gold  and  silver  coin  held  at  the  head  office 
during  the  four  weeks. 


97 


National     Monetary     Commission 

The  commissioners  were  instructed  to  publish  these 
accounts  in  the  London  Gazette,  and.  they  are  also  pub- 
lished in  the  Edinburgh  Gazette. 

The  commissioners  of  stamps  and  taxes  were  empowered 
to  inspect  the  books  and  papers  of  the  banks,  and  to  exam- 
ine the  amount  of  coin  held  by  them  at  all  reasonable 
times;  but  this  right  of  inspection  never  appears  to  be 
exercised. 

It  may  be  added  that,  as  in  the  case  of  the  English  joint 
stock  banks  with  a  right  of  note  issue,  the  liabilities  of 
Scottish  bank  shareholders,  in  banks  which  are  under  the 
limited  liability  acts,  is  unlimited  with  regard  to  note 
issue.  Three  of  the  oldest  of  the  Scottish  banks,  which 
were  organized  under  charters,  are  believed  to  involve  no 
further  liability  to  their  shareholders  beyond  the  amount 
paid  up  on  the  shares,  but,  as  in  the  case  of  the  Bank  of 
England,  there  is  a  certain  amount  of  doubt  with  regard  to 
the  question  of  liability  on  shareholders. 

The  Scottish  banks  regularly  publish  annual  balance 
sheets,  but  the  system  of  monthly  statements  adopted  by 
most  of  the  leading  English  banks  has  not  penetrated 
north  of  the  Tweed. 


98 


Chapter  III. 

THE  BANKING  BUSINESS  IN  ENGLAND  AND  SCOTLAND. 

(A)  ENGLISH  ARRANGEMENTS. 

The  general  nature  of  the  business  done  by  the  EngUsh 
banks  consists  as  elsewhere  in  taking  care  of  money  for 
one  set  of  customers  and  lending  it  to  another,  a  certain 
proportion  being  held  in  cash  or  invested  in  marketable 
securities.  In  England  the  bankers  are  also  the  chief 
creators  of  currency,  since  by  means  of  the  loans  that  they 
make  in  the  form  of  advances  and  discounts  they  create 
deposits  for  themselves  and  one  another  against  which 
the  checks  are  drawn  which  form  by  far  the  most  impor- 
tant part  of  English  currency. 

As  a  rule  it  may  be  said  that  whatever  be  the  class  of 
community  for  which  each  bank  or  banking  branch  is  pro- 
viding facilities,  the  customers  to  whom  it  lends  will  be 
chiefly  the  producing  and  mercantile  classes,  and  the  cus- 
tomers for  whom  it  takes  care  of  moqey  will  be  the  invest- 
ing classes,  that  is,  the  professional,  land-owning,  and 
propertied  classes,  though  it  will  also  hold  the  current  bal- 
ances of  the  producers  and  distributors,  who  are  as  a  rule 
the  most  important  borrowers. 

Owing  to  the  rapid  extension  of  banking  by  branches, 
the  business  in  England  has  lately  been  democratized  to 
a  very  remarkable  extent.  Not  many  years  ago  some 
banks  deprecated  the  drawing  of  checks  by  their  customers 

99 


National    Monetary     C  ommis  s  io 


n 


for  a  smaller  amount  than  £5;  nowadays  the  check  is 
frequently  used  for  the  settlement  of  the  smallest  retail 
transaction,  and  is  even  drawn  for  sums  smaller  than  £1. 
By  this  development,  the  alleged  advantage  of  the  Scot- 
tish banking  system,  which  provides  its  customers  with  a 
credit  instrument  in  the  shape  of  the  £1  note,  has  been 
largely  done  away  with,  since  the  flexibility  and  adapt- 
ability of  the  check  give  it  obvious  advantages. 

The  business  done  by  the  English  banks  in  the  provinces 
is  with  all  classes,  from  the  small  farmer  or  shopkeeper  in 
rural  districts  to  the  large  merchants  and  manufacturers 
in  centers  such  as  Liverpool  and  Manchester.  In  all  dis- 
tricts they  also  provide  banking  facilities  for  what  may 
be  called  the  private  or  investing  classes,  but  in  their  case, 
as  has  already  been  pointed  out,  the  banker  acts  chiefly 
as  the  custodian  or  guardian  of  money,  while  in  the  case 
of  the  mercantile  and  producing  sections  of  the  commu- 
nity he  also  acts  as  its  provider,  making  credit  and  cur- 
rency for  them  by  means  of  loans  and  discounts. 

With  regard  to  the  rates  charged,  it  is  impossible  to  lay 
down  any  rule  which  would  not  at  once  be  overwhelmed 
by  exceptions.  Banking  in  England  is  infinitely  flexible. 
It  adapts  itself  to  the^case  of  every  borrower  and  takes  into 
consideration  both  his  standing  and  the  security  offered. 
The  arrangements  that  it  makes  with  its  depositors  are  to  a 
greater  extent  regulated  by  use  and  wont,  but  even  in  their 
case  it  would  be  misleading  to  make  too  definite  statements. 
Arrangements  very  frequently  vary  in  accordance  with  the 
length  of  time  for  which  the  deposit  is  placed  with  the  bank, 
and  are  sometimes  modified  by  the  keenness  and  business 
acumen  of  the  depositor,  who  is  occasionally  able  to  squeeze 


The    English     Banking     System 

his  banker  by  hints  at  more  favorable  accommodation  to  be 
obtained  from  competitors. 

The  liabihties  of  banks  to  the  pub  He — that  is  to  say,  the 
money  that  they  receive  and  take  care  of  for  it — are  divided 
into  current  and  deposit  accounts.  Current  accounts  are 
held  by  the  banks  on  behalf  of  every  kind  of  customer. 
Anybody,  that  is  to  say,  who  wishes  to  make  use  of  bank- 
ing facilities  opens  a  current  account  with  his  banker, 
either  by  paying  in  cash  or  credit  instruments,  or  by  obtain- 
ing a  loan  from  the  banker,  and  uses  this  current  account 
in  order  to  draw  checks  against  it  for  the  purposes  of  his 
business  if  he  be  a  business  man,  or  for  his  necessary 
purchases  if  he  be  a  private  investor  living  on  accumulated 
or  inherited  capital.  This  class  of  account  is  clearly  a 
convenience  provided  by  the  banker  to  the  customer;  the 
checks  drawn  by  the  customer  involve  a  large  amount  of 
clerical  work  on  the  staff  of  the  bank,  and  unless  the 
account  is  habitually  kept  at  a  sufficiently  remunerative 
level  no  interest  can  be  allowed  upon  it  by  the  banker; 
most  banks  stipulate  that  unless  the  balance  is  maintained 
at  at  least  £ioo  the  customer  must  pay,  for  the  facilities 
given  by  means  of  it,  either  a  regular  payment  at  the  end 
of  each  half-year  or  a  small  commission  upon  the  turnover. 

When  the  current  account  is  provided  by  means  of  a 
loan  from  the  bank,  the  charge  or  commission  is  still 
made  over  and  above  the  interest  on  the  loan,  and  when 
there  is  no  definite  arrangement  of  a  loan,  but  a  customer 
is  allowed  to  draw  checks  up  to  a  certain  amount  by 
way  of  overdraft,  the  commission  is  charged  as  well  as 
the  rate  of  interest  on  the  borrowing  which  the  overdraft 
represents. 


National     Monetary     Commission 

Proceeding  to  the  deposit  accounts,  we  may  say  that 
these  chiefly  represent  temporary  investments  on  behalf 
of  members  of  the  community  who  have  money  in  hand 
which  they  wish  to  keep  readily  available.  In  some  cases 
they  are  of  a  more  permanent  character,  being  placed  by 
customers  who  wish  always  to  have  funds  available  with- 
out the  expense  and  delay  involved  by  the  realization  of 
securities.  The  rates  allowed  upon  them  in  London  vary 
roughly  in  accordance  with  the  Bank  rate  and  are  usually 
I  %  per  cent  below  it.  But  it  must  be  remembered  that 
special  arrangements  are  often  made  with  the  banks  by 
customers  who  are  prepared  to  place  deposits  for  longer 
periods  than  the  one  week's  notice  which  is  always  insisted 
on  in  theory,  though  very  rarely  enforced  in  practice. 
If  a  customer  wished  to  remove  deposit  funds  immediately, 
very  few  bankers  would  refuse  to  permit  him  to  do  so. 

In  the  provinces  the  rates  allowed  to  depositors  do  not 
fluctuate  in  accordance  with  Bank  rate,  but  are  kept 
much  steadier.  As  a  general  rule  their  minimum  is  2| 
per  cent,  probably  because  this  is  the  amount  allowed  to 
depositors  by  the  post-office  savings  bank,  as  was  noted 
in  an  earlier  part  of  this  memorandum,  so  that  the  keen- 
ness with  which  modern  banks  compete  for  small  depositors 
makes  it  necessary  for  them  rarely  to  give  less  than  this 
rate.  Bankers,  however,  though  by  this  custom  they 
frequently  give  their  depositors  during  periods  of  cheap 
money  a  higher  rate  than  is  apparently  warranted  by  the 
quotations  current  in  the  London  market,  recoup  them- 
selves to  some  extent  when  money  is  dearer  by  the  steadi- 
ness which  they  maintain  in  the  rate  allowed  to  country 
depositors.     That  is  to  say,  in  districts  where  2|  per  cent 


The    English     Banking     System 

is  the  normal  charge  it  will  only  be  at  times  when  Bank 
rate  is  exceptionally  high  that  depositors  will  receive 
more  than  their  usual  allowance,  so  that  at  periods  of 
comparatively  dear  money  the  bargain  is  to  some  extent 
on  the  side  of  the  banker,  though  here  again,  as  always,  it 
must  be  remembered  that  he  is  liable  to  be  squeezed  by 
the  stress  of  competition  and  the  keenness  of  customers 
who  are  able  to  make  use  of  it. 

With  regard  to  loans  and  discounts  it  need  hardly  be 
said  that  their  nature  is  chiefly  dictated  by  the  form  of 
business  or  industry  in  which  the  community  for  which 
the  bank  provides  facilities  is  chiefly  employed.  The 
bills  discounted  vary  from  the  promissory  notes  of  cus- 
tomers for  the  purposes  of  temporary  borrowing  to  the 
large  trade  acceptances  of  merchants,  shipbuilders,  etc. 
According  to  the  nature  of  the  community  served,  ad- 
vances made  by  the  bank  will  be  largely  against  produce 
and  commodities,  or  against  marketable  securities;  owing 
to  the  greater  convenience  and  simplicity  in  handling 
enjoyed  by  the  latter  class  of  collateral,  loans  against  it 
are  generally  made  on  rather  more  favorable  terms. 

In  the  city  of  London,  the  business  of  which  is  chiefly 
finance,  it  follows  that  the  business  done  by  the  banks 
chiefly  consists  in  providing  faciUties  for  financial  cus- 
tomers; the  bills  that  they  discount  are  largely  those 
accepted  by  the  great  accepting  houses  or  by  themselves, 
or  by  the  other  banks,  and  the  advances  that  they  make 
are  largely  against  marketable  securities,  or  against  the 
bills  of  exchange  brought  to  them  as  collateral  by  the  bill 
brokers  and  discount  houses.  The  current  rates  for 
loans  quoted  in  London  may  be  said  roughly  to  express 

103 


National     Monetary     Commission 

the  price  at  which  the  bankers  are  prepared  to  make  these 
advances  to  the  bill  brokers,  and  owing  to  the  nature  of 
the  security  and  the  standing  of  the  borrower  are  habit- 
ually lower  than  those  charged  to  any  other  class  of 
customer. 

A  large  business  is  also  done  by  the  banks  in  making 
advances  to  members  of  the  stock  exchange  for  financ- 
ing the  speculative  commitments  of  the  public.  These 
advances  are  made  from  one  account  to  another  on  the 
London  Stock  Exchange.  The  account  is  the  term  for 
the  settlements  which  this  body  carries  out  twice  in 
every  month,  and  it  thus  follows  that  advances  of  this 
kind  usually  run  for  about  a  fortnight.  Most  of  the 
bankers  divide  these  advances  into  two  classes;  one,  on 
which  they  charge  a  slightly  higher  rate,  they  make  to 
their  ordinary  stock-exchange  customers,  the  other,  on 
sHghtly  more  favorable  terms,  is  arranged  with  a  few 
leading  firms  who  act  as  money  brokers  between  the 
banks  and  the  rest  of  the  stock  exchange,  borrowing  in 
large  amounts  from  the  banks  and  making  a  small  profit 
by  relending  to  other  members  of  the  stock  exchange 
whose  standing  and  borrowing  facilities  are  not  quite  so 
high  as  their  own.  Some  of  the  banks,  however,  do  not 
recognize  this  distinction,  but  consider  themselves  suffi- 
ciently well  informed  concerning  the  position  of  all  their 
stock-exchange  clients  to  make  advances  to  them  directly 
without  the  intervention  of  an  intermediary. 

As  to  the  acceptances  of  the  banks,  they  are  largely 
entered  into  on  behalf  of  their  trade  customers  and,  in 
so  far  as  this  is  the  case,  are  confined  to  bills  against 
genuine    produce    moving    into    consumption.     A    com- 

104 


The    English     Banking     System 

mission  of  one-eighth  to  one-fourth  of  i  per  cent  is  gen- 
erally charged  by  the  bank  for  accepting  the  bills.  Of  late 
years,  as  has  been  noted  above,  the  extent  to  which  the 
banks  have  entered  into  the  acceptance  business  has  shown 
a  considerable  increase,  and  in  the  case  of  some  of  them 
the  acceptance  business  done  is  less  of  a  purely  com- 
mercial character,  involving  the  handling  of  a  good  deal 
of  merely  financial  paper  drawn  against  securities. 

(B)  SCOTCH  ARRANGEMENTS. 

In  Scotland  the  arrangements  between  bankers  and 
their  customers  are  very  similar  to  those  prevalent  in 
England,  differences  between  them  being  a  matter  of 
degree  rather  than  of  essence.  The  cash  credit  system, 
which  is  usually  pointed  to  as  a  characteristic  feature  of 
Scottish  banking,  has  been  described  in  an  earlier  part  of 
this  memorandum,  and  it  was  then  pointed  out  that  this 
system  of  allowing  a  customer  to  obtain  credit  with  the 
assistance  of  the  pledge  of  a  friend  is  by  no  means  unknown 
in  England,  and  also  that  in  the  chief  centers  of  Scotch 
banking  activity  the  English  system  of  lending  chiefly 
against  definite  collateral  security  is  now  largely  prevalent. 

But  in  the  matter  of  the  rates  charged  there  is  an  im- 
portant difference  between  English  and  Scottish  banking, 
which  also  has  been  noted  above.  It  lies  in  the  fact  that 
the  Scottish  banks  form  a  combination  which  works  to- 
gether in  complete  harmony  and  unanimity.  There  is  no 
possibility  in  Scotland  for  a  customer  who  thinks  that  he 
might  obtain  a  higher  rate  for  a  deposit  or  a  lower  rate  for 
an  advance  to  threaten  his  banker  that  he  will  go  across 
the  street  to  a  competitor.  The  Scotch  banks  stand  to- 
gether and  adhere  to  the  rates  on  which  they  agree  among 

105 


National     Monetary     Commission 

themselves  as  being  equitable  under  the  circumstances  of 
the  money  market.  The  rates  that  they  allow  to  deposi- 
tors they  usually  regulate  more  or  less  in  accordance  with 
the  London  Bank  rate,  but  their  minimum  is  i  per  cent 
and  their  maximum  is  4  per  cent.  They  make  no  allow- 
ance on  current  accounts  and  nothing  is  allowed  to  de- 
positors except  on  money  which  has  remained  in  the  hands 
of  the  bank  for  at  least  thirty  days.  The  rates  at  which 
they  will  make  advances  or  discount  bills  are  equally 
definite  and  determined.  They  are  arranged  by  the 
banks  in  accordance  with  what  they  consider  to  be  fair 
from  the  rates  current  in  the  London  discount  market, 
but  they  do  not  necessarily  fluctuate  with  London's  move- 
ments, and  when  they  are  altered  the  alterations  are  by 
at  least  one-half  of  i  per  cent  at  a  time.  When  it  is  re- 
membered that  the  London  discount  markets  fluctuate 
by  sixteenths  of  i  per  cent  it  is  at  once  apparent  how  suc- 
cessfully the  Scottish  bankers  control  the  price  of  the  com- 
modity that  they  deal  in.  But  it  must  be  remembered 
that  the  control  which  they  exercise  is  modified  to  some 
extent  by  the  competition  of  the  London  money  market, 
since  their  big  customers  sometimes  resent  the  hard  and 
fast  rules  of  the  Scottish  monetary  system  and  go  south 
of  the  Tweed  for  accommodation. 

(C)  ENGLISH  BANKING  ASSOCIATIONS. 

The  chief  organizations  or  associations  of  banks  other 
than  clearing  houses  in  England  are  the  Institute  of 
Bankers,  the  Central  Association  of  Bankers,  and  the 
Association  of  English  Country  Bankers.  Since  the 
functions   of  these   associations   are  being  described  by 

106 


The    English     Banking    System 

another  writer  who  is  intimate  with  the  details  of  their 
working,  it  need  only  be  said  here  that  they  have  little  or 
no  practical  power  in  regulating  the  manner  in  which  the 
banks  conduct  their  business.  They  meet  to  discuss  ques- 
tions of  banking  practice,  but  their  power  over  those  of 
their  members  who  do  not  choose  to  follow  the  conclusions 
arrived  at  is  practically  nonexistent.  The  only  regulating 
influence  in  English  banking  is  that  of  the  Bank  of  England, 
and  it  is  only  exercised  occasionally  and  under  exceptional 
circumstances.  Occasions  have  been  known  on  which  the 
governor  of  the  bank  has  summoned  the  manager  of  one  of 
the  banks  whose  action  he  thought  fit  to  question  and 
administered  remonstrance  and  rebuke ;  but  such  an  occur- 
rence is  extremely  rare.  Moreover,  as  has  been  shown  in 
earlier  portions  of  this  memorandum,  the  Bank  of  England 
intervenes  and  regulates  the  price  of  money  in  London  by 
means  of  measures  which  have  already  been  described, 
namely,  by  borrowing  in  order  to  make  its  own  rate 
effective,  and  raising  that  rate  if  it  thinks  it  necessary  in 
the  interests  of  the  market  as  a  whole.  These  measures  it 
has  to  take  more  or  less  frequently,  but,  nevertheless,  they 
are  only  taken  when  the  circumstances  of  the  case  require 
it,  and  at  other  times  the  L-ondon  money  market  is  left 
practically  without  regulation,  with  the  result  that  the 
keen  competition  between  the  bankers  causes  them  to 
create  credit  at  rates  which  are  barely  remunerative  to 
themselves  and  sometimes  have  an  adverse  effect  in  de- 
pressing discount  rates  and  turning  the  foreign  exchanges 
against  London.  This  lack  of  cohesion  and  regulation  is  a 
necessary  result  of  the  enormous  extension  of  the  power 
and  business  of  what  are  commonly  called  the  clearing 

107 


National    Monetary     Commission 

banks,"  that  is  to  say,  the  chief  joint  stock  banking  com- 
panies and  the  few  private  banks  which  survive  as  impor- 
tant factors  in  the  London  money  market.  They  are  now 
the  chief  manufacturers  of  credit  and  currency  for  London 
and  for  England,  and  since  there  is  no  legal  restriction 
whatever  concerning  the  proportion  of  cash  to  liabilities 
that  they  are  obliged  to  hold,  or  any  other  detail  of  their 
credit-making  business,  it  follows  that  they  work  entirely 
in  accordance  with  the  dictates  of  their  own  prudence, 
their  large  body  of  accumulated  experience,  and  the  fine 
traditions  which  influence  the  best  of  them. 

The  working  of  the  English  machine  is  thus  distinguished 
by  extraordinary  ease  and  elasticity,  the  perfection  of 
which  is  only  marred  by  this  lack  of  cohesion  which 
makes  the  machine  work  perhaps  rather  too  easily  in  nor- 
mal times  and  in  periods  of  pronounced  monetary  abun- 
dance. In  times  of  difficulty,  when  the  Bank  of  England 
is  taking  measures  to  obtain  control,  the  clearing  banks 
usually  support  it  loyally,  and  work  with  a  view  to  assist- 
ing the  objects  which  it  is  trying  to  secure.  But  in  nor- 
mal times  the  lack  of  cohesion  sometimes  results  in  over- 
financing,  which  has  unfortunate  subsequent  effects.  It 
is  clearly  desirable  that  the  cooperation  between  the 
Bank  of  England  and  the  clearing  banks,  which  is  gener- 
ally found  in  times  of  difficulty,  should  be  extended  to 
the  periods  of  more  normal  conditions.  And  it  may 
also  be  said  that  some  closer  agreement  with  regard  to 
the  rates  charged  among  the  English  banks  is  perhaps 
desirable  on  the  lines  of  the  Scottish  model,  but  with  less 
cast-iron  inflexibility. 

o  Literally  this  phrase  means  the  banks  which  are  members  of  the 

clearing  house. 

108 


The    English     Banking     System 

(D)  CONCLUSION. 

In  summing  up  the  aspects  of  English  banking,  we  may 
point,  as  its  most  obvious  feature,  to  its  complete  freedom 
from  restriction  and  regulation  by  the  law  of  the  country. 
English  bankers  are  all  agreed,  and  most  critics  who  have 
studied  the  flounderings  of  Peel's  Act  of  1844  will  prob- 
ably agree  with  them,  that  this  absence  of  legal  restriction 
has  been  of  very  great  benefit  to  English  banking.  By 
a  fortunate  coincidence  the  restrictions  which  Peel's  Act 
attempted  to  impose  actually  assisted  the  banks  to  pro- 
ceed along  a  higher  line  of  development.  Peel's  Act  laid 
down  arbitrary  restrictions  on  the  issue  of  notes,  with  the 
result  that  English  banking  turned  its  attention  to  the 
development  of  the  most  perfectly  flexible  and  adaptable 
credit  instrument,  the  check.  From  the  experiences  of 
the  English  system  the  conclusion  would  seem  to  emerge 
that  in  a  civilized  and  well-ordered  community  the  less 
banking  is  restricted  by  the  legislature  the  more  satisfac- 
tory and  adaptable  its  progress  is  likely  to  be.  At  the 
same  time,  from  the  great  difhculty  that  has  been  expe- 
rienced by  the  leading  English  bankers  in  inducing  the 
smaller  and  weaker  banks  to  follow  a  high  ideal  of  busi- 
ness, it  may  be  concluded  that  there  is  one  regulation 
which  legislatures  could  with  excellent  and  wholesome 
effect  lay  down  upon  banking.  For  the  smaller  and 
weaker  English  banks  have  been  tempted  to  follow  prin- 
ciples which  would  be  dangerous  if  adhered  to  by  the 
banking  community  as  a  whole,  by  the  complete  absence 
of  publicity  under  which  they  work.  We  have  seen  that 
the  law  only  requires  them  to  make  a  wholly  unmeaning 


109 


National    Monetary     Commission 

declaration  twice  a  year,  and  though  they  do  in  fact  pub- 
Hsh  yearly  and  half-yearly  balance  sheets,  many  of  them 
make  these  statements  useless  as  a  guide  to  their  actual 
position  by  omitting  to  state  separately  the  amount  of 
their  cash  in  hand  or  with  other  bankers.  If  the  law 
obliged  all  bankers  in  England  to  publish  a  uniform  balance 
sheet,  or  at  any  rate  a  balance  sheet  showing  the  amount 
of  their  cash  in  hand,  and  if  at  the  same  time  regulations 
were  made  by  which  "window-dressing"  operations  foi* 
these  balance  sheets  were  impossible,  there  is  no  doubt 
that  an  important  weak  spot  in  English  banking  would 
be  eliminated. 

And  the  conclusion  may  thus  be  arrived  at,  from  the 
experience  of  England,  that  the  less  the  law  does  for 
banking  the  better,  except  that  it  is  desirable  that  it 
should  insist  upon  universal  and  genuine  publicity  being 
applied  to  the  banking  community,  and  that  bankers 
should  all  be  made  to  show  their  position,  not  only  on  a 
certain  day,  but  by  means  of  averages,  throughout  the 
period  covered  by  the  statement.  The  fear  of  external 
criticism  among  bankers  is  so  great,  and  the  fact  that  they 
depend  upon  the  confidence  of  the  public  is  so  clearly 
grasped  by  them,  that  if  the  amount  of  publicity  implied 
be  only  full  enough,  and  if  the  tests  applied  to  the  genuine- 
ness of  the  statements  are  only  sufficiently  complete,  there 
seems  to  be  good  reason  to  expect  that  bankers  will,  if 
otherwise  left  to  themselves,  take  the  best  possible  care 
of  the  business  that  they  conduct  for  their  own  share- 
holders and  for  the  community. 


Chapter  IV. 

THE  LONDON  STOCK  EXCHANGE. 

(A)  THE  INSTITUTION  OF  THE  JOBBER. 

In  several  important  respects  the  London  Stock  Exchange 
differs  widely  from  similar  institutions  in  other  centers; 
but  the  most  characteristic  feature  of  its  organization  lies 
in  the  division  of  its  members  into  two  classes,  brokers  and 
dealers,  the  latter  being  more  commonly  described  as 
jobbers.  The  broker,  as  such,  buys  or  sells  securities  on 
behalf  of  another  party,  who  is  called  his  client  and  pays 
him  a  commission;  the  dealer  or  jobber  provides  the  market 
to  which  the  broker  applies,  the  former  being  prepared  to 
buy  or  sell  any  of  a  certain  number  of  securities  in  which 
he  specializes  and  trusting  to  cover  his  bargains  at  a  profit 
by  "undoing"  them,  as  it  is  called,  with  another  broker 
or  jobber. 

The  broker,  of  course,  is  a  constant  feature  on  all  stock 
exchanges.  He  executes  the  orders  of  the  general  public, 
buying  and  selling  securities  on  its  behalf,  arranging  their 
delivery  when  the  bargains  are  real,  or  their  financing 
when  the  dealings  are  speculative,  and  charging  a  com- 
mission for  his  work.  The  institution  of  the  jobber  is 
peculiar  to  London,  and  his  existence  makes  the  whole 
aspect  and  organization  of  London's  business  unique  in 
this  respect.  In  other  centers  the  place  of  the  jobber  is 
supplied,  to  some  extent,  by  "room  traders,"  by  mem- 
bers who  specialize  on  certain  securities ;  but  as  definitely 
organized  into  a  separate  group,  the  jobber  is  only  to  be 
found  in  London.  The  floor  of  the  London  Stock  Exchange 
is  divided  into  groups  of  these  jobbers,  who  are  always  to 


76651 — 10- 


National     Monetary     Commission 

be  found  in  a  particular  place.  Each  group  constitutes  a 
market  in  a  special  class  of  securities — British  government 
stocks,  foreign  government  bonds,  American  railroad 
stocks,  South  African  mining  shares,  etc. — so  that  any 
broker  who  receives  an  order  to  buy  or  sell  any  security 
dealt  in  in  London  can  walk  straight  to  a  certain  place  in 
the  stock  exchange,  knowing  that  he  will  there  find  a  knot 
of  jobbers  prepared  to  buy  or  sell  it,  at  a  price,  and  to 
name  the  prices  at  which  they  will  buy  or  sell  before  they 
know  which  they  are  to  be  asked  to  do.  Hence  it  follows 
that  when  asked  to  name  a  dealing  quotation,  they  always 
give  a  double  price,  meaning  that  they  will  buy  at  the 
lower  or  sell  at  the  higher,  trusting  to  cover  the  bargain  at 
a  profit  by  means  of  the  margin  in  their  favor  which  the 
double  price  gives  them. 

The  extent  of  this  margin  varies  according  to  the  free- 
dom of  the  market  in  the  security  that  is  dealt  in.  In  the 
case  of  securities  of  average  marketability  in  London,  such 
as  British  and  American  railway  stocks  and  foreign  gov- 
ernment bonds,  the  margin  usually  quoted  is  one-fourth 
of  I  per  cent.  Thus  the  quotation  for  London  and  North- 
western Railway  stock  would  be  12,1 /{,  131 /4',  for  Erie 
shares,  38  to  38>^;  for  Russian  fives,  99K,  99K-  But  in 
actual  dealing,  as  will  be  shown  later,  a  skillful  broker  will 
probably  impel  his  jobber  to  come  a  little  closer — that  is, 
to  name  a  rather  narrower  margin,  three-sixteenths  or 
even  one-eighth  of  i  per  cent.  In  the  case  of  a  stock  like 
British  consols,  the  market  in  which  is  especially  free,  the 
usual  quotation  gives  a  margin  of  one-eighth  of  i  per 
cent — 843/^  to  84>^ ;  and  when  it  is  a  question  of  mining  and 
industrial  shares  of  small  denomination,  which  are  quoted 


The    English     Banking     S  y  s  t  e 


m 


on  the  basis  of  so  much  per  share  and  not  in  hundreds  of 
stock,  the  margin  is  often  reduced  to  3d,  or  even  less. 
For  instance,  the  share  of  the  British  South  Africa  Com- 
pany will  be  quoted  at  29s.  to  29s.  3d.,  because  it  is  evident 
that  a  small  margin  enables  the  dealer  to  make  a  big  profit 
when  it  applies  to  each  share  in  every  hundred  turned  over. 

The  profit  made  by  the  jobber  or  jobbers  by  means  of 
this  margin  is  called  his  "  turn,"  and  it  obviously  averages 
half  the  margin.  If  a  jobber  knows  that  a  stock  is  chang- 
ing hands  in  the  market  at  99^,  he  will  make  his  price  to 
a  broker  who  comes  to  him  99  3,^^,  99^,  and  having  bought 
at  99  3/8  or  sold  at  99  Yz  expects  to  even  himself  at  99  >^.  In 
the  case  of  a  mining  share  his  turn  may  thus  only  amount 
to  I  >2d. ;  but  in  the  first  case  he  makes  a  turn  of  one-eighth 
of  I  per  cent  on  each  £100  stock;  in  the  second  he  makes 
i^d.  on  each  share.  Thus  if  he  deals  in  £1,000  stock  he 
earns  ten-eighths  of  i  per  cent,  £1 ,  5s.  od. ;  if  in  200  mining 
shares  his  turn  will  be 30od.,  £1  5s.  od.  again.  In  the  case 
of  securities  seldom  dealt  in,  and  in  which  the  market  is 
consequentl}^  not  free,  the  margin  between  the  buying 
and  selling  quotation  will  be  i  per  cent  or  more,  because 
the  chance  of  the  jobber's  being  able  to  cover  himself 
quickly  and  at  a  profit  is  obviously  lessened  by  the  com- 
parative rarity  of  sellers  and  buyers.  And  sometimes 
when  the  market  in  securities  is  especially  narrow,  jobbers 
do  not  attempt  to  "make  prices" — that  is,  to  name  two 
quotations  at  which  they  are  prepared  to  deal  outright — 
but  negotiate  the  purchase  or  sale  for  the  broker  (who 
then  has  to  disclose  the  nature  of  his  business),  and 
charge  a  "turn"  for  their  trouble  and  special  knowledge. 

Illustrating  this  peculiarity  of  London  Stock  Exchange 

"3 


National     Monetary     Commission 

business  by  a  concrete  example,  we  may  imagine  that  a 
broker  receives  an  order  from  a  client  to  buy  loo  shares 
in  the  Union  Pacific  Railroad.  He  goes  to  that  part  of 
the  "house,"  as  the  stock  exchange  calls  itself,  in  which 
a  seething  mass  of  shouting  jobbers  is  gathered  who  con- 
stitute the  American  market.  He  is  promptly  accosted 
by  one  of  the  jobbers  and  asked  if  he  has  anything  to  do, 
and  replies  that  he  wants  to  deal  in  a  few  Unions.  The 
jobber,  knowing  that  the  current  price  of  Unions  is  198^, 
intimates  that  he  will  buy  at  198^  and  sell  at  igS^;  this 
he  does  by  merely  naming  the  two  fractions  "an  eighth, 
three-eights, "  since  the  figure  is  supposed  to  be  already 
known  to  the  broker.  The  latter  by  merely  looking  ex- 
pectant, or  by  showing  an  inclination  to  move  on  to  an- 
other jobber,  or  by  asking  his  jobber  to  "come  closer," 
generally  induces  the  latter  to  quote  a  narrower  margin, 
"Three-sixteenths,  three-eighths,"  says  the  jobber,  guess- 
ing him  to  be  probably  a  buyer.  The  broker  shakes  his 
head  and  goes  on  to  another  jobber,  and  finally  either 
succeeds  in  getting  his  shares  at  1983^,  or  at  least  satis- 
fies himself  that  1983/^isthe  best  that  he  can  do  for  his 
client. 

The  broker  is  thus  protected  by  the  fact  that  the  jobber 
does  not  know,  when  naming  his  price,  whether  he  will  be 
made  to  buy  or  sell  the  shares,  for,  having  made  the  price, 
he  is  bound  to  accept  the  bargain  whichever  way  the 
broker  may  declare  himself;  and,  as  has  been  shown,  the 
broker,  unless  he  definitely  asks  for  a  price  to  be  made  on 
a  certain  basis,  can  always  go  from  one  jobber  to  another 
trying  to  get  a  price  made  which  suits  his  client's  business. 
Competition  between  one  jobber  and  another  enables  the 

114 


The    English     Banking    System 

broker  to  deal  on  the  narrowest  possible  margin,  and  tends 
continually  to  reduce  the  "turns"  which  the  jobbers  earn. 

It  must  be  noted  that  when  a  jobber  makes  a  price  with- 
out the  number  of  shares  or  amount  of  stock  being  stated, 
he  is  bound  to  deal,  in  even  sums,  up  to  the  amount  of 
either  £i,ooo  stock  or  bonds,  or  the  equivalent  in  foreign 
currency;  loo  shares  of  a  market  value  of  £i  or  under;  50 
shares  of  a  market  value  of£i  to  £15;  10  shares  of  a  market 
value  of  over  £  1 5 ;  or  100  American  shares  of  $100. 

If,  when  the  jobber  has  named  his  original  price,  the 
broker  asks  him  to  "come  closer,"  the  former  is  at  once 
released  from  his  obligation  to  deal  at  the  price  originally 
named.  The  capacity  of  jobbers  to  deal  readily  and 
freely,  and  at  close  prices,  is  obviously  increased  when  they 
are  not  always  anxious  to  keep  their  accounts  even,  and 
cover  every  bargain,  but  are  prepared  to  "  run  a  book  "  as 
it  is  called,  taking  stock  when  it  is  offered  freely  and  being 
ready  to  carry  it  for  a  time,  or  if  the  market  is  the  other 
way,  facing  the  position  of  being  "short.  "  Their  power 
thus  to  act  as  merchants  rather  than  mere  dealers  has  been 
lessened  by  the  great  increase  that  has  taken  place  in  recent 
years  in  their  number;  since  the  consequent  diminution  in 
the  volume  of  business  done  by  each,  and  the  narrowing  of 
turns,  has  made  them  less  able  to  take  the  greater  risk 
involved  by  running  a  book.  Those  who  still  do  so,  how- 
ever, have  the  advantage  of  getting  more  custom  from  the 
brokers,  and  they  are  thus  better  able  to  tell  what  the  out- 
side public  is  doing  in  the  stocks  in  which  they  specialize. 

When  acting  as  a  pure  dealer,  the  jobber  is  always  lia- 
ble to  the  risk  that  the  market  may  have  gone  against  him 
before  he  can  undo  his  bargain.     If  a  number  of  brokers 


"5 


National     Monetary     Commission 

are  buying  or  selling  simultaneously  this  may  easily  hap- 
pen, and  the  jobber  requires  a  very  active  and  alert  intelli- 
gence in  order  to  keep  closely  in  touch  with  the  true  state 
of  the  market.  He  is  not  bound  to  make  a  price  if  he  is 
asked  to  do  so,  and  sometimes  when  the  market  is  alto- 
gether demoralized  it  happens  that  jobbers  refuse  to  deal 
on  the  system  described  above.  This  is  quite  a  rare  occur- 
rence, however,  and  as  a  rule  it  is  expected  of  them  that 
they  should  be  prepared  to  provide  a  market  and  take  the 
risks  of  their  position.  The  jobber's  business  is  on  the 
whole  a  profitable  one,  and  when  the  market  is  active  and 
free  he  makes  profits  rapidly,  the  volume  of  his  turnover 
fully  compensating  him  for  the  narrowness  of  the  margin 
on  which  he  works.  His  office  expenses  are  small  when 
compared  with  those  of  the  broker,  who  has  to  conduct 
correspondence  with  clients,  and  from  the  nature  of  his 
business  he  has  less  reason  to  fear  bad  debts;  for  the 
jobber,  as  such,  deals  only  with  other  members  of  the 
stock  exchange,  brokers  or  other  jobbers,  and  they  have  to 
meet  their  debts  on  settling  day,  or  declare  themselves 
defaulters.  But  the  broker  deals  for  outside  clients,  and  if 
they  are  unable  to  meet  their  speculative  losses  the  broker 
has  to  pay  and  take  his  chance  of  recovering  the  debt  by 
means  of  legal  proceedings. 

The  justification  of  the  jobber  lies  in  the  ease  and  freedom 
which  his  existence  imparts  to  business  in  London.  Lon- 
don's business  is  so  diverse,  and  the  number  of  dift'erent 
securities  there  dealt  in  is  so  great,  that  if  every  broker  who 
received  an  order  had  to  look  for  another  who  wanted  to 
buy  what  he  wanted  to  sell  or  vice  versa,  the  work  which  is 
now  done  could  never  be  got  through.     The  English  public , 

ii6 


The     English    Banking     System 

which  only  comprehends  the  system  in  a  very  hazy  manner, 
often  blunders  into  a  theory  that  the  jobber  is  an  expensive 
luxury,  and  can  not  understand  why  it  should  have  to  pay 
the  jobber's  turn  as  well  as  the  broker's  commission.  But 
in  fact  the  jobber  is  an  ingenious  example  of  the  division  of 
labor  and  without  him  the  brokers  would  have  to  charge 
their  clients  extra  commissions,  which  would  more  than 
make  up  for  the  saving  of  the  jobber's  turn,  and  much  of 
the  business  that  is  now  done  readily  and  quickly  could  not 
be  got  through  at  all. 

In  recent  years  there  has  been  a  tendency  toward  the 
blurring  of  the  line  that  divides  the  two  classes  of  members 
of  the  London  Stock  Exchange.  Certain  of  the  brokers 
have  taken  to  specializing  in  various  securities  and  making 
prices  in  them  like  jobbers,  to  the  detriment  of  the  business 
of  the  latter,  and  a  practice  has  also  now  been  developed, 
by  which  brokers  with  orders  to  execute,  sometimes  find 
it  advisable  to  do  their  business  with  outside  firms  instead 
of  with  the  jobbers  in  the  House.  This  was  especially  the 
case  with  South  African  shares,  large  orders  in  which  were 
frequently  transacted  with  the  South  African  firms,  and 
American  bonds  in  which  the  Anglo-American  houses  were 
often  able  to  provide  dealing  facilities  on  more  favorable 
terms  than  the  jobbers.  And  since  the  brokers  who  dealt 
outside  the  House  received  a  commission  from  both  parties, 
it  was  plausibly  urged  by  the  jobbers  who  opposed  the 
system  that  it  led  to  their  soinetimes  doing  so  even  when 
their  clients'  interests  would  have  been  best  served  by  a 
bargain  with  a  jobber. 

While  the  brokers  were  thus  encroaching  on,  or  ignoring, 
the  jobbers  in  the  transaction  of  business,  the  latter  were 

117 


National    Monetary    Commission 

at  the  same  time  retaliating  by  opening  business  connec- 
tions outside  the  stock  exchange.  The  most  notable 
example  of  this  process  was  the  development  of  arbitrage 
business  between  Wall  street  and  the  jobber  in  the  Ameri- 
can market  in  London,  and  of  similar  transactions  between 
the  English  provincial  stock  exchanges  and  the  jobbers  in 
the  various  markets.  Formerly  the  provincial  brokers 
when  they  had  an  order  to  execute  in  London  sent  the 
order  to  a  firm  of  London  brokers;  but  many  of  them 
gradually  adopted  the  plan  of  opening  up  direct  relations 
with  a  firm  of  jobbers  in  each  of  the  principal  markets  in 
the  London  Stock  Exchange  and  doing  a  business  with 
them,  similar  to  arbitrage  in  securities  with  a  foreign 
center,  but  commonly  called  "shunting."  The  provincial 
broker,  being  kept  advised  of  the  state  of  the  market  in 
London  by  his  allied  jobber,  bought  and  sold  in  Liverpool, 
or  wherever  else  he  might  be  established,  and  covered  his 
bargains  in  London,  dividing  the  profits  or  losses  with 
the  jobber.  From  the  nature  of  these  relations  it  fol- 
lowed that  the  provincial  brokers  were  unable  to  avail 
themselves  of  one  of  the  most  important  safeguards  which 
the  English  system  gives  to  the  London  brokers  in  dealing 
for  their  clients,  namely,  their  power  of  going  on  from- one 
jobber  to  another,  if  they  believe  that  they  can  so  get  better 
terms  for  their  clients.  The  provincial  broker  was  evi- 
dently in  the  hands  of  the  jobber  with  whom  he  entered 
into  relations,  and  it  was  consequently  contended  that  his 
client's  business  was  not  done  any  more  cheaply  for  the 
elimination  of  the  commission  paid  to  the  London  broker, 
which  earned  for  the  client  the  power  to  take  advantage  of 
the  higgling  of  the  market. 

ii8 


The    English    Banking    System 

In  any  case  the  tendency  by  which  brokers  and  jobbers 
were  encroaching  on  one  another's  functions  and  breaking 
down  the  boundary  which  originally  divided  the  two 
classes  of  members  was  noted  with  strong  disapproval 
by  a  majority  of  their  number,  and  led  in  1908  to  a  reac- 
tion which  produced  an  amendm.ent  of  the  rules,  by 
which  the  functions  of  the  two  classes  were  more  clearly 
defined  and  brokers  and  jobbers  were  expressly  forbidden 
to  poach  on  one  another's  preserves.  No  alteration  was 
made  in  the  matter  of  arbitrage  transactions  with  foreign 
centers,  but  "shunting"  business  with  provincial  ex- 
changes was  forbidden.  Critics  of  this  reform  promptly 
demonstrated  its  illogical  nature,  but  the  English  mind 
is  never  afraid  of  disregarding  logic.  Jobbers  were  re- 
stricted to  their  original  function  of  making  prices  for 
brokers  who  came  to  them  with  business  to  do,  and 
brokers  were  forbidden  to  do  business  except  with  job- 
bers, unless  they  had  first  ascertained  that  they  could 
thereby  buy  or  sell  on  more  favorable  terms,  and  if  they 
found  that  they  could  deal  to  greater  advantage  outside, 
they  were  forbidden  to  take  two  commissions. 

These  measures  were  strongly  objected  to  by  an  im- 
portant section  of  the  members  of  the  stock  exchange, 
most  of  the  leading  firms  opposing  them.  Since  these 
leading  firms  had  built  up  or  increased  their  business 
under  the  freer  conditions  previously  prevalent,  it  was 
natural  that  they  should  regard  as  reactionary  and  unde- 
sirable a  change  which  modified  these  conditions  pro- 
foundly. But  the  rank  and  file  of  the  members  took  the 
contrary  view,  being  apparently  convinced  that  the  in- 
stitution of  the  jobber  is  a  useful  and  indispensable  wheel 


119 


National    Monetary     Commission 

in  London's  machinery,  enabling  it  to  conduct  an  enor- 
mously diversified  business  with  remarkable  economy  and 
dispatch,  and  that  a  tendency  under  which  the  distinction 
between  him  and  the  broker  was  being  gradually  elimi- 
nated had  to  be  checked.  And  the  1909  election  of  the 
committee  for  general  purposes,  which  is  responsible  for 
the  framing  and  interpretation  of  the  rules  governing 
these  details  of  business,  emphatically  indorsed  the  reform 
of  1 908  by  which  the  division  of  members  into  brokers  and 
jobbers  was  defined  more  strictly  and  more  rigorously 
enforced.  But  it  should  be  added  that  the  majority  of 
the  leading  firms  persist  in  the  view  that  this  "  reform  "  is 
a  step  backward,  and  since  the  jobbers  constitute  a  ma- 
jority of  the  members,  and  their  existence  was  threatened 
by  the  tendency  against  which  the  new  rules  were  di- 
rected, their  emphatic  indorsement  of  them  must  have 
been  to  some  extent  biased  by  considerations  of  personal 
interest. 

(B)  CONSTITUTION  AND  MEMBERSHIP. 

As  compared  with  the  New  York  Exchange  or  the  Paris 
Bourse,  the  London  Stock  Exchange  has  hitherto  made 
very  inadequate  stipulations  for  the  financial  strength 
and  stability  of  its  members.  And  it  is  generally  sup- 
posed that  this  neglect  of  a  very  important  detail  arose 
from  the  nature  of  its  constitution.  It  is  practically  a 
proprietary  club,  owned  by  shareholders  in  whose  eyes 
the  extent  of  the  annual  profits  and  the  bulk  of  the  divi- 
dends they  receive  are  naturally  the  most  important  con- 
sideration. From  their  point  of  view,  since  the  chief 
source  of  revenue  of  the  company  was  the  annual  sub- 


The     English     Banking     System 

scriptions  of  the  members,  it  followed  that  a  rapid  and 
constant  increase  in  their  numbers  was  the  consummation 
most  of  all  to  be  desired,  and  that  any  attempt  at  an 
examination  of  their  financial  status  was  almost  entirely 
left  out.  The  consequence  of  this  defect  is  that  a  con- 
siderable number  of  members  are  supported  by  resources 
which  are  quite  inadequate  when  compared  with  the 
standard  of  New  York  or  Paris,  and  that  in  this  respect 
the  London  Stock  Exchange  is  a  less  helpful  handmaid  to 
the  English  banking  system  than  it  might  be.  Since  it  is 
highly  important  to  bankers  that  the  securities  which  they 
handle,  invest  in,  and  advance  against,  should  be  readily 
realizable  in  time  of  difficulty,  it  follows  that  the  ability 
of  the  stock  exchange  to  suffer  shocks  with  equanimity  is 
a  matter  of  great  moment  from  the  banking  point  of  view. 
And  it  can  not  be  doubted  that  the  number  of  members 
whose  resources  are  comparatively  slender,  and  the  con- 
sequent comparatively  high  proportion  of  failures  among 
them,  give  a  certain  amount  of  instability  to  markets  in 
Eondon.  But  it  is  easy  to  exaggerate  the  importance  of 
this  consideration,  and  the  great  aggregate  wealth  of  the 
members,  and  the  ease  and  elasticity  with  which  the  Eng- 
lish banking  system  provides  credit  faciUties,  go  far 
toward  mitigating  it. 

Some  attempt  has  been  made  at  reform  in  this  con- 
nection, though  the  direct  object  aimed  at  by  the  reform- 
ers was  not,  perhaps,  an  increase  in  the  financial  stability 
of  the  members  so  much  as  a  restriction  in  the  increase  in 
their  numbers  and  the  creation  of  a  vested  interest  for  the 
existing  members  of  their  body.  The  proprietors,  or 
shareholders,   in   the   stock  exchange  were   all   of   them 


National    Monetary     Commission 

necessarily  members  of  it,  but  members  were  not  neces- 
sarily shareholders,  and  this  fact  tended  to  a  diversity  of 
interest.  As  has  been  shown,  the  shareholders  from  the 
point  of  view  of  an  increasing  revenue  desired  a  constant 
addition  to  the  number  of  the  members,  from  whose 
entrance  fees  and  subscriptions  their  revenue  was  derived. 
The  members,  as  a  whole,  especially  in  times  when  the 
volume  of  business  was  small,  naturally  considered  that 
the  constant  addition  to  their  number  was  an  inconvenient 
process,  since  it  tended  to  whet  the  edge  of  competition 
and  so  reduce  the  commissions  earned  by  the  brokers  and 
the  turns  made  by  the  jobbers.  (For  it  should  be  noted 
that  in  London  the  commissions  charged  have  not " 
hitherto  been  in  any  way  regulated  by  the  governing 
authority,  but  are  left  to  arrangement  between  brokers 
and  their  clients.)  From  the  point  of  view  of  the  public, 
this  increase  of  competition  and  cheapening  of  stock 
exchange  facilities  was  an  obvious  gain,  but  against  it  we 
have  to  set  the  disadvantage  caused  by  the  comparative 
insecurity  arising  out  of  the  constant  influx  of  members 
whose  financial  resources  were  limited.  From  the  public's 
point  of  view,  as  well  as  that  of  the  bankers,  it  is  highly 
important  that  the  members  of  the  institution  which 
buys  and  sells  securities  for  it  should  be  well  supplied 
with  capital  and  credit.  If  a  considerable  number  of  them 
are  comparatively  poor,  the  fear  of  default  by  clients  or 
of  being  locked  up  with  securities  that  can  not  be  realized 
except  at  a  loss,  has  an  exaggerated  effect  on  their  nerves 
and  on  their  actions  in  times  when  markets  are  demoral- 

tJjune,   1909.     The  question  of   an  authorized    scale   is   now  engaging 
the  attention  of  the  committee. 


The     English     Banking     System 

ized  by  any  political  or  financial  accident;  and  conse- 
quently a  leaven  of  weakness  among  the  members  of  the 
stock  exchange,  who  are  apt  to  rush  to  realize  and  reduce 
commitments  on  behalf  of  themselves  or  their  clients  at 
the  first  hint  of  difficulty  or  trouble,  has  some  effect  in 
diminishing  the  stability  of  markets. 

Formerly  the  utmost  that  was  required  of  anyone  aspir- 
ing to  become  a  member  of  the  London  Stock  Exchange 
was  that  he  should  pay  an  entrance  fee  of  £510,  and  find 
three  members  who  would  be  sureties  for  him  to  the  ex- 
tent of  £500  each  for  a  period  of  four  years;  that  is  to 
say,  if  he  failed  before  this  period  had  passed,  his  sureties 
were  bound  to  pay  up  to  that  amount  to  his  creditors  on 
the  stock  exchange.  Afterwards  he  stood  on  his  own 
legs,  and  since  his  entrance  fee  had  passed  to  the  share- 
holders, there  was  nothing  but  his  own  capital  that  any 
creditor  could  depend  on.  Concerning  the  amount  of 
his  capital,  there  was  no  stipulation  or  inquiry,  and  in- 
stances have  been  known  of  members  beginning  business 
with  £500,  or  less. 

By  new  rules  made  in  1904  each  candidate  for  admis- 
sion to  membership  must  obtain  a  nomination  either 
from  a  member  willing  to  retire  in  his  favor,  or  from  one 
who  has  retired  within  the  previous  twelve  months,  or 
from  the  legal  representatives  of  one  who  has  died  within 
the  previous  twelve  months;  and  also  has  to  become  a 
proprietor  in  the  stock  exchange  by  acquiring  one  or 
more  shares. 

The  object  of  these  regulations  was  to  insure  that  hence- 
forward members  of  the  "house"  should  be  possessed  of 
something  of  which  they  could  dispose  on  retirement,  but 

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National    Monetary     Commission 

since  one  of  the  rules  embodying  them  laid  it  down  that 
the  right  of  nomination  should  not  be  exercised  by  a  de- 
faulter, they  did  not  go  far  toward  strengthening  the  posi- 
tion of  creditors  in  case  of  failure. 

A  certain  number  of  candidates  for  election  may  be 
admitted  each  year  without  nomination;  the  number  is 
fixed  annually  by  the  committee,  and  these  nominated 
candidates  are  confined  to  the  ranks  of  clerks  who  have 
served  for  three  years  in  the  "house"  or  four  years  in  the 
settling  room.  It  should  be  explained  that  a  clerk  in  the 
"house"  is  one  who  has  the  right  of  entry  to  the  stock 
exchange  itself  in  which  the  business  of  dealing  is  carried 
on  (he  is  not  necessarily  empowered  to  deal,  and  can  not 
be,  until  he  has  served  two  years  as  a  clerk  in  the  "  house; " 
if  he  is,  he  is  called  an  authorized  clerk).  A  settling  room 
clerk  only  has  the  right  of  entry  to  the  rooms  in  which  the 
business  of  checking  bargains  is  done  and  part  of  the  de- 
tail work  of  the  settlement  is  carried  out.  Clerks  in  the 
"house"  and  settling  room  clerks  wear  distinctive  badges. 
Those  who  desire  to  become  members  without  the  ex- 
pense of  procuring  a  nomination  must  have  served  four 
years  in  the  "house"  or  settling  room,  with  a  minimum 
service  in  the  "house"  of  three  years. 

Clerks  of  this  standing  are  also  privileged  in  the  matter 
of  sureties  or  recommenders,  since  they  are  only  required 
to  find  two  who  will  guarantee  them  to  the  extent  of  £300 
for  four  years.  Other  applicants  must  find  three  recom- 
menders, who  will  each  engage  to  pay  £500  to  their  creditors 
if  they  default  within  four  years.  In  any  case  the  recom- 
menders must  be  members  of  the  stock  exchange  of  not 
less  than  four  years'  standing,  who  have  fulfilled  all  their 

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The    English     Banking     S  y  st  e  tn 

engagements  and  are  not  indemnified.  Applicants  who 
enter  with  two  sureties  only  have  to  pay  half  the  entrance 
fee  charged  to  the  less  privileged  class.  It  is  500  guineas 
for  the  latter,  250  guineas  for  the  former. 

The  recommenders  have  to  answer,  concerning  the  can- 
didate whom  they  recommend,  certain  questions,  as  to 
whether  he  has  ever  been  bankrupt,  etc.,  and  among  them, 
"Would  you  take  his  check  for  £3,000  in  the  ordinary 
way  of  business?"  But  it  must  not  be  supposed  that  an 
affirmative  answer  to  this  question  implies  that  the  can- 
didate has  £3,000  of  his  own.  It  does  imply  that  in  the 
opinion  of  the  recommender  he  would  not  draw  such  a 
check  unless  there  were  funds  at  his  back  to  meet  it;  but 
it  is  only  an  expression  of  opinion  and  does  not  in  any  way 
bind  the  recommender.  This  inquiry  is  an  institution  of 
old  standing,  and  it  has  not  prevented  the  introduction 
of  many  members  whose  resources  were  far  below  the 
sum  named  in  it. 

It  should  be  noted  that  clerks  who  before  their  employ- 
ment on  the  stock  exchange  were  engaged  as  principals  in 
any  other  business  must  produce  three  sureties  for  £500. 

To  return  to  the  acquisition  of  proprietorship  that  is  now 
necessary  before  admission,  in  this  case  again  the  way  is 
made  easier  for  candidates  who  have  served  a  qualifying 
period  as  clerks ;  they  have  to  acquire  one  share  in  the  com- 
pany that  owns  the  stock  exchange,  whereas  those  who 
come  in  with  three  sureties  must  become  possessed  of  three 
shares.  By  this  process,  in  course  of  time  all  members  of 
the  stock  exchange  will  ultimately  be  share-holders,  and 
the  diversity  in  the  interests  of  the  proprietors  and  mem- 
bers will  thus  gradually  be  abolished. 

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National    Monetary     Commission 

Summing  up  the  payments  and  preliminaries  that  have 
to  be  gone  through  before  an  appHcant  can  become  a  mem- 
ber of  the  stock  exchange,  we  find  that  he  now  has  (i)  to 
pay  an  entrance  fee  of  £525,  if  entering  with  three  sureties, 
or  £262  los.  od.  if  entering  with  two  sureties;  (2)  to  buy  a 
nomination  (now,  June,  1909,  said  to  be  worth  £100  to 
£125) ,  unless  specially  admitted  by  leave  of  the  committee; 
(3)  to  buy  one  share  (priced  now  at  £177)  if  a  clerk  of  four 
years'  standing,  or  three  shares  if  not,  or  if  previously  a 
principal  in  some  other  business ;  (4)  to  obtain  two  sureties 
(whom  he  must  not  indemnify)  for  £300  for  four  years  if  a 
clerk  of  four  years'  standing,  or  three  sureties  for  £500  if 
not,  or  if  previously  a  principal  in  some  other  business. 

The  most  that  he  can  be  required  to  pay  is  thus  £1,181, 
and  the  least  £439  los.  od.  If  he  becomes  a  defaulter  he 
forfeits  the  right  of  nomination,  and  so  the  minimum  that 
he  must  certainly  be  possessed  of  in  that  case  is  one  share 
in  the  stock  exchange.  In  Paris  each  agent  de  change 
has  to  buy  a  seat,  costing  about  £60,000  and  show  that  he 
possesses  a  working  capital  of  £20,000,  and  deposit  £12,000 
making  a  total  necessary  capital  of  about  £92,000,  and  his 
solvency  is  guaranteed  by  all  the  rest;  and  in  New  York, 
each  member  has  a  seat  to  dispose  of,  the  value  of  which 
ranges  about  £16,000;  and  it  is  thus  evident  that  the 
financial  strength  of  the  members  of  the  London  Stock 
Exchange  is,  comparatively,  extremely  limited,  and  the 
much  greater  frequency  of  failures  in  London  is  thus  easily 
accounted  for. 

This  weakness  of  the  London  Stock  Exchange,  proceed- 
ing from  the  limited  financial  resources  of  many  of  the 
members,  has  arisen  largely  from  the  fact  that  it  is  a  pro- 

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The    English     Banking     System 

prietary  establishment  conducted  for  the  profit  of  a  body 
of  shareholders,  which  profit  was  most  obviously  secured 
by  the  rapid  increase  in  the  number  of  members.  This 
increase  has  tended  to  cheapening  of  stock  exchange 
facilities  through  competition  and  so  increased  the  diffi- 
culty of  making  money  rapidly  among  the  members,  and 
made  them  more  reluctant  to  take  risks  in  order  to  support 
markets,  and  more  likely  to  be  nervous  when  any  shock 
occurs. 

(C)  THE  GOVERNMENT  OF  THE  EXCHANGE. 
The  diversity  of  interest  between  the  shareholders  and 
members  also  necessitates  dual  control.  There  are  two 
committees,  one  composed  of  nine  members,  and  called  the 
trustees  and  managers,  or  more  commonly  the  managers. 
This  committee  is  practically  the  board  of  the  company 
that  owns  the  stock  exchange  building,  and  is  elected  by 
the  shareholders.  It  decides  questions  of  entrance  fees  and 
subscriptions  and  the  disposition  of  the  company's  reve- 
nue. There  is  also  the  committee  for  general  purposes, 
commonly  spoken  of  as  the  committee,  which  consists  of 
thirty,  elected  by  the  members  of  the  stock  exchange;  it 
regulates  the  relations  between  members,  as  such,  in  their 
business  dealings,  punishes  them  with  suspension  or 
expulsion  if  they  break  the  letter  or  the  spirit  of  its  rules, 
settles  all  questions  connected  with  the  intricacies  of 
market  operations,  and  decides  concerning  the  granting  of 
settlements  and  quotations  to  new  securities.  It  has  no 
revenue  to  handle,  and  if  it  desires  any  expenditure  can 
only  make  recommendations  to  the  managers.  In  prac- 
tice this  system  of  dual  control  works  quite  smoothly,  and 
the  new  rule,  which  makes  every  new  member  a  sliare- 

76651 — 10 9  127 


National    Monetary     Commission 

holder,  will  gradually  abolish  the  diversity  of  interest  that 
brought  it  into  being. 

(D)  THE  SETTLEMENT  AND  OTHER  DETAILS. 

Business  in  the  London  Stock  Exchange  is  complicated 
by  the  fact  that  a  large  number  of  the  securities  in  which 
it  deals  are  not  to  bearer,  but  registered  and  transferable 
by  deed.  In  the  case  of  a  bearer  security,  the  buyer  pays 
his  check,  or  passes  over  currency  or  any  acceptable  form 
of  credit  instruments,  takes  his  bonds  or  shares,  the  pos- 
session of  which  is  in  itself  evidence  that  he  is  their  owner, 
and  the  bargain  is  concluded.  And  thus,  in  settling 
business  in  securities  of  this  kind,  it  is  merely  a  question 
of  bringing  the  real  buyer  and  the  real  seller  together 
through  the  machinery  of  the  cleaning  house  and  the  thing 
is  done. 

But  when  registered  stock  and  shares  are  transferred,  the 
process  is  much  more  complicated,  for  in  this  case  nothing 
passes  from  seller  to  buyer  which  gives  the  latter  immedi- 
ate possession.  A  holder  of  these  securities  is  registered 
as  such  in  the  books  of  the  company,  or,  in  the  case  of 
government  and  municipal  stocks,  of  the  bank  or  other 
agent  that  keeps  the  register,  and  only  possesses  a  certifi- 
cate stating  that  he  is  so  registered,  which  is  a  mere 
memorandum  carrying  no  evidence  of  title.  The  transfer 
from  one  holder  to  another  is  effected  by  a  deed  of  transfer, 
to  which  this  certificate  is  usually  attached,  and  conse- 
quently before  the  bargain  can  be  completed  it  is  necessary 
that  the  selhng  broker  should  be  informed  of  the  name, 
address,  and  style  of  the  transferee  to  whom  the  stock  or 
shares  are  to  be  passed,  so  that  he  may  be  enabled  to  make 


The    English    Banking  System 

out  a  deed  of  transfer,  signifying  that,  in  consideration  of 
such  and  such  a  sum  paid  by  A  the  transferee,  B  the  trans- 
ferrer sells  to  him  so  much  stock  or  so  many  shares.  This 
deed,  duly  stamped  and  either  certified  or  accompanied 
by  the  certificate,  being  delivered  to  the  buying  broker,  he 
pays  the  consideration  money  and  lodges  the  deed  with 
the  company,  whose  securities  are  transferred,  or  with  the 
agents  of  the  Government  or  municipality,  and  his  client 
the  transferee  is  then  registered  as  their  possessor. 

The  complication  introduced  by  this  necessity  for  the 
preparation  of  a  deed  of  transfer  makes  the  business  of 
the  settlement  in  London  a  lengthy  process.  It  involves 
the  preparation  by  the  buying  broker  of  a  form  called  a 
ticket,  stating  the  name,  address,  and  description  of  the 
client  to  whom  the  stock  is  to  be  transferred,  and  this 
ticket  is  passed  to  his  seller,  and  so  on  through  interme- 
diate sellers  to  the  real  seller,  or  the  party  who  is  prepared 
to  deliver  the  stock.  In  the  case  of  most  active  securities 
this  passing-on  process  is  effected  through  the  clearing 
house,  but  in  others  the  ticket  is  passed  on  by  one  firm  to 
another  in  the  settling  room. 

Hence  it  is  that  four  days  are  required  for  the  fort- 
nightly settlements  at  which  all  bargains  in  London  are 
completed,  unless  specially  executed  for  cash  or  for  a 
later  settlement.  The  first  two  days  are  called  the 
contango,  carry-over,  or  continuation  days;  on  the  first  of 
them  the  account  in  mining  shares  is  carried  over;  on  the 
second,  the  account  in  other  markets,  except  the  consols 
market;  on  them  brokers  who  have  bought  or  sold 
securities  for  clients  who  do  not  intend  to  take  them  up 
or  deliver  them,  but  propose  to  continue  the  bargains 

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National    Monetary     Commission 

with  a  view  to  covering  them  at  a  profit,  make  arrange- 
ments to  this  end.  Every  bargain  by  the  rules  of  the 
house  has  to  be  completed  at  the  settlement,  and  there- 
fore stock  which  has  been  bought  and  is  not  meant  to  be 
taken  up  has,  on  contango  day,  to  be  sold  for  cash  and 
simultaneously  bought  for  the  new  account.  These  carry- 
over bargains  are  all  entered  at  the  "making  up"  price 
which  is  fixed  by  the  dealers  at  noon  on  contango  day. 
And  since  a  buyer  is  thus  released  from  his  obligation  to 
find  cash  for  his  purchase  he  is  charged  a  rate  for  the 
accommodation.  This  rate  varies  according  to  the  state 
of  the  market  in  the  particular  stock — in  cases  where 
there  is  a  large  bull  account  in  a  market  well  supplied 
with  stock  the  rate  is  frequently  out  of  all  proportion  to 
the  rate  ruling  for  money;  but  when  a  stock  happens  to 
be  oversold  the  rate  may  "run  off"  and  a  bull  may 
continue  his  stock  "even,"  or  is  sometimes  paid  a  "back- 
wardation " — a  fine  paid  by  bears  of  stock  that  they  can  not 
deliver.  A  large  proportion  of  stock  open  on  speculative 
account  is  thus  settled  by  bringing  the  bulls  and  bears 
together,  and  any  balance  of  stock  open  is  arranged  by 
jobbers  or  brokers  taking  up  the  stock  for  the  speculator 
on  his  paying  stamp  and  fee  and  a  fair  rate  for  the 
accommodation. 

The  third  day  of  the  London  settlement  is  devoted  to 
the  passing  of  tickets  described  above,  setting  forth  the 
names  into  which  stock  and  shares  are  to  be  transferred, 
and  this  day  is  consequently  called  ticket  day  or  name 
day. 

On  the  fourth  day  bearer  securities  and  transfer  deeds 
of  registered  stocks  are  delivered  to  the  buyers  and  the 

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The   English  Banking   System 

consideration  money  is  paid;  but  it  should  be  observed 
that  ten  days'  grace  are  allowed  for  the  delivery  of  regis- 
tered stock,  to  give  time  for  the  seller  to  sign  the  transfer 
and  for  the  deed  to  be  certified.  It  often  happens,  of 
course,  that  the  seller  is  not  parting  with  the  whole  of  his 
holding  in  a  stock,  and  therefore  is  not  prepared  to  give 
up  his  certificate  to  be  attached  to  the  transfer  deed  and 
delivered  to  the  buyer.  In  these  cases  the  certificate  and 
transfer  deed  are  forwarded  either  directly  to  the  com- 
pany, or  through  the  secretary  of  the  share  and  loan  de- 
partment of  the  stock  exchange,  and  the  transfer  deed  is 
certified  as  in  order.  And  a  certain  amount  of  time  is 
obviously  required  for  the  execution  of  these  formalities 
and  for  the  procuring  of  the  signature  in  cases  where  the 
transferer  may  happen  to  be  abroad.  On  this  last  day  of 
the  settlement,  which  is  usually  called  pay  day  or  account 
day  or  settling  day,  all  differences  are  paid  arising  out  of 
speculative  transactions. 

It  should  be  added  that  if  a  seller  of  stock  does  not 
receive  a  ticket  by  the  proper  time  on  ticket  day,  inform- 
ing him  into  whose  name  it  is  to  be  transferred,  he  can 
"sell  it  out" — that  is,  sell  it  to  some  other  buyer,  and 
any  consequent  loss  falls  on  the  party  who  is  responsible 
for  the  delay  in  passing  the  ticket.  Similarly,  a  buyer 
who  has  passed  a  ticket  and  has  not  had  the  transfer  deed 
delivered  after  the  ten  days  of  grace  allowed,  can  "buy  it 
in  " — that  is,  buy  the  stock  for  cash  from  some  other  seller. 

These  details  of  the  settlement  are  generally  carried  out 
by  clerks,  and  it  must  not  be  supposed  that  the  business  of 
the  "house"  is  seriously  interfered  with  for  three  days 
every  fortnight;  some  interruption  there  may  be,  in  opera- 

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National    M  o  n  et  ar  y     Commission 

tions  that  members  carry  out  on  their  own  account,  but 
any  orders  that  come  in  from  cHents  are  attended  to  as 
usual. 

There  is  yet  another  class  of  security  in  London,  besides 
bearer  and  registered,  namely,  inscribed  stocks.  These  are 
chiefly  government  and  municipal  stocks,  and  British 
consols  are  included  among  them.  Inscribed  stocks  can 
only  be  transferred  by  the  actual  attendance  of  the  trans- 
ferrer, who  is  identified  by  his  broker  as  the  real  owner  of 
the  stock,  or  by  a  power  of  attorney  executed  by  him  in 
favor  of  his  broker. 

Modern  tendencies  appear  to  be  in  favor  of  the  growth  of 
bearer  securities,  owing  to  their  more  convenient  handling, 
and  since  the  strong  prejudice  in  their  favor  which  exists 
abroad  gives  them  a  freer  market  on  the  continental 
bourses,  it  is  becoming  usual  to  give  holders  of  inscribed 
and  registered  stock  the  option  of  obtaining  bearer  certifi- 
cates. This  has  long  been  done  in  the  case  of  British  con- 
sols, of  which  foreign  investors  frequently  hold  large 
amounts.  It  should  be  mentioned  that  the  settlements  in 
consols  and  the  other  securities  dealt  in  in  the  consols 
market  are  not  fortnightly  but  monthly.  A  great  deal  of 
the  business  in  these  stocks,  however,  is  carried  out  for  cash, 
and  is  settled  at  once  by  immediate  transfer  and  payment. 

(E)  THE  OFFICIAL   LIST. 

A  daily  list  is  published  by  the  managers  of  the  stock 
exchange  under  the  authority  of  the  committee,  giving  the 
prices,  at  3.30  p.  m.,  of  about  5,000  securities  officially 
quoted.  It  also  gives  the  amount,  authorized  and  out- 
standing, of  each  security,  and  states  its  face  value  and  the 


132 


The     English     Banking    System 

amount  paid  up  on  it,  the  date  at  which  it  was  last  ex 
dividend,  and  the  amount  of  the  dividend  then  deducted. 
By  the  side  of  the  quotation  is  a  space,  in  which  are  printed 
any  "marks"  or  records  of  business  done  that  members 
may  wish  to  have  officially  reported.  These  marks  by  no 
means  cover  all  the  business  done,  for  there  is  no  obligation 
on  any  member  to  mark  every  bargain  that  he  transacts; 
and  though  some  old-fashioned  brokers  adopt  the  practice 
of  marking  all  their  business,  as  far  as  possible,  it  is  the 
exception  rather  than  the  rule  for  a  bargain  to  be  marked. 
The  marking  is  done  by  the  insertion  of  a  slip  of  paper  with 
the  security  dealt  in  and  the  price  dealt  at,  and  the  name  of 
the  firm  marking  it,  into  a  box  provided  for  the  purpose. 
The  note  is  transferred  by  an  official  to  the  marking  board, 
which  is  thus  during  the  day  a  record  of  actual  bargains,  or 
some  of  them,  and  is  finally  printed  in  the  Official  L-ist. 

Before  a  security  can  be  granted  a  quotation  in  the  list 
certain  formalities  have  to  be  observed,  which  are  set  out 
as  follows  in  an  appendix  to  the  rules  of  the  committee: 

SPECIAL  SETTLEMENTS. 

The  following  documents  and  particulars  should  be  sent 
to  the  secretary  of  the  share  and  loan  department  when 
application  is  made  for  a  special  settlement: 

SCRIP    OR   BONDS   OF   NEW   LOANS. 

A  specimen  of  the  scrip  or  bond. 

A  copy  of  the  prospectus,  circular,  or  advertisement 
relating  to  the  issue. 

A  statutory  declaration  stating — 

I.  The  amount   allotted  (a)  to  the   public,    (6)  to 
others. 


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National    Monetary     Commission 

2.  The  distinctive  numbers  and  denomination  of 

each  class  of  scrip  or  bond. 

3.  The  amount  paid  up  thereon. 

•4.  That  the  scrip  or  bonds  are  ready  to  be  dehvered. 

SHARES   OF    NEW    COMPANIES. 

The  certificate  of  incorporation. 

A  specimen  of  the  share  certificate. 

A  copy  of  the  prospectus — the  statement  in  Heu  of  pro- 
spectus as  filed  with  the  registrar  of  joint  stock  com- 
panies— circular,  or  advertisement  relating  to  the  issue. 

A  specimen  call  letter. 

Certified  printed  copies  of  contracts  relating  to  the  issue 
of  shares  credited  as  fully  or  partly  paid. 

A  letter  from  the  secretary  of  the  company  stating — 

1 .  That  the  share  certificates  are  ready  to  be  issued. 

2.  The  distinctive  numbers  of  the  shares  allotted 

(a)  to  the  public,  (6)  to  the  venders. 

3.  The  particulars  of  the  company's  capital. 

4.  The  nominal   amount  of  each   share,   and  the 

amount  paid  in  cash  or  credited  as  paid  on 
each  share. 

5.  In  cases  where  the  whole  of  the  capital  has  not 

been  issued  at  the  time  the  application  is 
made,  whether  the  unissued  shares  are  venders' 
shares  or  are  held  in  reserve  for  future  issue. 

STOCK  OR  DEBENTURE  STOCK  OF  NEW  COMPANIES. 

A  specimen  of  the  scrip  or  stock  certificate. 

A  copy  of  the  prospectus — the  statement  in  lieu  of  pro- 
spectus as  filed  with  the  registrar  of  joint  stock  com- 
panies— circular,  or  advertisement  relating  to  the  issue. 

A  letter  from  the  secretary  of  the  company,  stating: 

1.  The  amount  allotted  (a)   to  the  public,   {h)  to 

others. 

2.  The  amount  paid  in  cash  per  £100  stock. 

3.  That  the  scrip  or  stock  is  ready  to  be  issued. 

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The    English    Banking    System 

OFFICIAL  QUOTATIONS. 

CONDITIONS  PRECEDENT  TO  AN  APPLICATION  FOR  OFFICIAL 

QUOTATION. 

1.  That  the  prospectus — 

Shall  have  been  publicly  advertised; 

Agrees  substantially  with  the  act  of  Parliament  or 
articles  of  association ; 

Provides  for  the  issue  of  not  less  than  one-half  of 
the  authorized  capital  and  for  the  payment  of  lo 
per  cent  upon  the  amount  subscribed; 

If  offering  debentures  or  debenture  stock,  states 
fully  the  terms  of  redemption. 

In  cases  where  a  compan}^  has  sold  an  issue  of  de- 
bentures or  debenture  stock  which  is  subse- 
quently offered  for  public  subscription  either  by 
the  company  or  any  subsequent  purchaser,  states 
the  authority  for  the  issue  and  all  conditions  of 
sale. 

2.  That  two-thirds  of  the  amount  proposed  to  be  issued 
of  any  class  of  shares  or  securities,  whether  such  issue  be 
the  whole  or  a  part  of  the  authorized  amount,  shall  have 
been  applied  for  by  and  unconditionally  allotted  to  the 
public,  shares  or  securities  granted  in  lieu  of  money  pay- 
ments not  being  considered  to  form  a  part  of  such  public 
allotment. 

3.  That  the  articles  of  association,  and  the  trust  deed 
where  such  is  required,  contain  the  provisions  specified 
hereafter. 

4.  That  the  certificate  or  bond  is  in  the  form  approved. 

ARTICLES   OF   ASSOCIATION. 

Articles  of  association  should  contain  the  following 
provisions : 

I.  That  none  of  the  funds  of  the  company  shall  be 
employed  in  the  purchase  of  or  in  loans  upon  the  security 
of  its  own  shares. 

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National     Monetary     Commission 

2.  That  directors  must  hold  a  share  quaUfication. 

3.  That  the  borrowing  powers  of  the  board  are  hmited. 

4.  That  the  nonforfeiture  of  dividends  is  secured. 

5.  That  the  common  form  of  transfer  shall  be  used. 

6.  That  all  share  and  stock  certificates  shall  be  issued 
under  the  common  seal  of  the  company  and  shall  bear 
the  signatures  of  one  or  more  directors  and  the  secretary. 

7.  That  fully  paid  shares  shall  be  free  from  all  lien. 

8.  That  the  interest  of  a  director  in  any  contract  shall 
be  disclosed  before  execution,  and  that  such  director  shall 
not  vote  in  respect  thereof. 

9.  That  the  directors  shall  have  power  at  any  time  and 
from  time  to  time  to  appoint  any  other  qualified  person 
as  a  director  either  to  fill  a  casual  vacancy  or  as  an  addi- 
tion to  the  board,  but  so  that  the  total  number  of  directors 
shall  not  at  any  time  exceed  the  maximum  number  fixed, 
but  that  any  director  so  appointed  shall  hold  ofiice  only 
until  the  next  following  ordinary  general  meeting  of  the 
company,  and  shall  then  be  eligible  for  reelection. 

10.  That  a  printed  copy  of  the  report,  accompanied  by 
the  balance  sheet  and  statement  of  accounts,  shall,  at 
least  seven  days  previous  to  the  general  meeting,  be 
deHvered  or  sent  by  post  to  the  registered  address  of  every 
member,  and  that  two  copies  of  each  of  these  documents 
shall  at  the  same  time  be  forwarded  to  the  Secretary  of 
the  Share  and  Loan  Department,  the  Stock  Exchange, 
London. 

1 1 .  That  the  charge  for  a  new  share  certificate  issued  to 
replace  one  that  has  been  worn  out,  lost,  or  destroyed 
shall  not  exceed  i  shilling. 

TRUST   DEEDS. 

Trust  deeds  should  contain  the  following  provisions : 
I.  Where  provision  is  made  that  the  security  shall  be 
repayable  at  a  premium,  either  at  a  fixed  date  or  at  any 

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The     English    Banking    System 

time  upon  notice  having  been  given,  the  trust  deed  must 
further  provide  that  should  the  company  go  into  voluntary 
liquidation  for  the  purpose  of  amalgamation  or  recon- 
struction the  security  shall  not  be  repayable  at  a  lower 
price. 

2.  The  following  clause  should  be  inserted  in  all  deeds: 
"  The  statutory  power  of  appointing  new  trustees  hereof 
shall  be  vested  in  the  company,  but  a  trustee  so  appointed 
must  in  the  first  place  be  approved  of  by  a  resolution  of 
the  debenture  (or  debenture  stock)  holders  passed  in  the 
manner  specified  in  the schedule  hereto.  A  cor- 
poration or  company  may  be  appointed  a  trustee  of  these 
presents." 

3.  In  the  clause  regulating  the  convening  of  meetings 
of  the  debenture  (or  debenture  stock)  holders,  the  fol- 
lowing words  should  be  inserted,  "and  the  trustee  or 
trustees  shall  do  so  upon  a  requisition  in  writing  signed 
by  holders  of  at  least  one-tenth  of  the  nominal  amount 
of  debentures  (or  debenture  stock)  for  the  time  being 
outstanding." 

4.  The  clause  defining  an  "extraordinary  resolution" 
must  provide  that  "the  expression  'extraordinary  reso- 
lution' means  a  resolution  passed  at  a  meeting  of  the 
debenture  (or  debenture  stock)  holders  duly  convened 
and  held  at  which  a  clear  majority  in  value  of  the  whole 
of  the  debenture  (or  debenture  stock)  holders  is  present 
in  person  or  by  proxy  and  carried  by  a  majority  consisting 
of  not  less  than  three-fourths  of  the  persons  voting 
thereat  upon  a  show  of  hands,  and  if  a  poll  is  demanded 
then  by  a  majority  consisting  of  not  less  than  three- 
fourths  in  value  of  the  votes  given  on  such  poll." 

5.  Should  debentures  or  debenture  stock  be  entitled 
"first  mortgage,"  provision  must  be  made  for  the  creation 
of  a  specific  first  mortgage  in  favor  of  the  debenture  or 
debenture  stock  holders. 


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National    Monetary     Commission 

SHARE   AND   STOCK   CERTIFICATES. 

All  certificates  should  state  on  their  face  the  authority 
under  which  the  company  is  constituted  and  the  amount 
of  the  authorized  capital  of  the  company. 

The  following  footnote  should  appear  on  all  stock  and 
share  certificates:  "The  company  will  not  transfer  any 
stock  [shares]  without  the  production  of  a  certificate 
relating  to  such  stock  [shares];  which  certificate  must  be 
surrendered  before  any  deed  of  transfer,  whether  for  the 
whole  or  any  portion  thereof,  can  be  registered  or  a  new 
certificate  issued  in  exchange." 

Where  the  capital  of  a  company  consists  of  more  than 
one  class  of  shares  of  the  same  denomination,  the  dis- 
tinctive numbers  of  the  shares  of  each  class  must  be 
printed  on  the  face  of  the  share  certificates. 

All  preference  share  certificates  should  bear  on  their  face 
a  statement  of  the  company's  capital  and  the  conditions, 
both  as  to  capital  and  dividends,  under  which  the  shares 
are  issued. 

Debentures  and  debenture  stock  certificates  should,  in 
addition  to  legal  requirements,  state  on  their  face  the 
authority  under  which  the  company  is  constituted,  the 
nominal  capital  of  the  company,  the  dates  when  the  inter- 
est on  the  debentures  or  debenture  stock  is  payable,  and 
the  authority  under  which  the  issue  is  made  (i.  e.,  articles 
of  association  and  resolutions) ,  and  on  their  back  the  con- 
ditions of  issue,  redemption,  and  transfer. 

BONDS. 

Bonds  must  specify  the  amount  and  conditions  of  the 
loan,  the  powers  under  which  it  has  been  contracted,  and 
the  numbers  and  denominations  of  the  bonds  issued,  and 
in  the  case  of  a  loan  issued  either  wholly  or  partly  in  Lon- 
don those  issued  in  London  must  bear  the  autographic 
signature  of  the  London  agents  or  contractors. 


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The     English     Banking    System 

NEW   COMPANIES. 

Before  the  application  form  can  be  issued  for  signature 
there  must  be  suppHed — 

A  copy  of  the  prospectus. 

Two  copies  of  the  articles  of  association. 

In  the  case  of  debentures  or  debenture  stock  the  trust 
deed  [where  possible  before  execution]. 

After  the  application  form  has  been  signed  there  must 
also  be  supplied  in  the  case  of  shares — 

The  certificate  of  incorporation,  and  the  certificate  that 
the  company  is  entitled  to  commence  business. 

Two  certified  copies  of  the  prospectus,  indorsed  with  the 
date  when  first  advertised. 

Two  certified  copies  of  the  memorandum  and  articles  of 
association. 

The  original  letters  of  application. 

The  allotment  book  containing  a  list  of  applicants,  the 
number  applied  for  by  each,  and  the  result  of  each  ap- 
plication, with  a  summary  signed  by  the  chairman  and 
secretary. 

Should  the  allotment  have  taken  place  at  an  interval  of 
six  months  or  more  before  the  date  of  the  application,  a 
certified  list  of  present  shareholders  will  also  be  required. 

A  copy  of  the  letter  of  allotment  and  the  date  when 
posted. 

A  specimen  of  the  share  certificates. 

The  bankers'  pass  book,  accompanied  by  a  certificate  on 
a  special  form  from  the  company's  bankers,  stating  the 
amount  of  deposits  received  by  them,  and  the  number  of 
shares  on  which  such  deposits  (i.  e.,  application  money 
only,  being  £ per  share)  were  paid. 

Authenticated  copies  of  all  concessions  and  similar  docu- 
ments, with  notarially  certified  printed  translations,  and 
certified  printed  copies  of  all  contracts  and  agreements. 


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National    Monetary     Commission 

A  statutory  declaration  by  the  chairman  and  secre- 
tary, stating  the  following  particulars: 

1 .  That  the  prospectus  complies  with  the  provisions 

of  the  companies  acts. 

2.  That  all  documents  required  by  the  companies 

acts  have  been  duly  filed  with  the  registrar 
of  joint  stock  companies,  and  the  dates  of 
filing. 

3.  The  number  of  shares  applied  for  by  the  public. 

4.  The  number  of  shares  allotted  unconditionally 

to  the  public   (Nos to  ),  and  the 

amount  per  share  paid  thereon  in  cash. 

5.  The  number  of  shares  allotted  for  a  consideration 

other  than  cash  (being  Nos to ). 

6.  The  amount  of  deposits  paid,  and  that  such  de- 

posits are  absolutely  free  from  any  lien. 

7.  That  the  share  certificates  are  ready  for  delivery, 

that  the  purchase  of  the  properties  has  been 
completed  and  the  purchase  money  paid,  and 
that  no  impediment  exists  to  the  settlement 
of  the  account. 

8.  The  total  number  of  allottees  and  the  largest 

number  of  shares  (a)  applied  for  by  and  {b) 
allotted  to  any  one  applicant. 

After  the  application  form  has  been  signed  there  must 
be  supplied  in  the  case  of  debentures  and  debenture 
stock — 

The  certificate  of  incorporation,  or  act  of  Parliament, 
and  the  certificate  that  the  company  is  entitled  to  com- 
mence business. 

A  certified  printed  copy  of  the  mortgage  deed  or  other 
similar  document,  and  the  official  certificate  of  the  regis- 
tration of  the  mortgage  or  charge. 

Certified  copies  of  the  articles  of  association,  resolutions, 
or  other  authority  for  the  present  issue. 


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The     English     Banking    System 

Two  certified  copies  of  the  prospectus. 

The  original  letters  of  application. 

The  allotment  book  containing  a  list  of  applicants,  the 
amount  applied  for  by  each,  and  the  result  of  each  applica- 
tion, with  a  summary  of  the  whole  signed  by  the  chairman 
and  secretary. 

Should  the  allotment  have  taken  place  at  an  interval  of 
six  months  or  more  before  the  date  of  the  application,  a 
certified  list  of  present  stockholders  will  also  be  required. 

A  copy  of  the  allotment  letter  and  the  date  when  posted. 

A  specimen  of  the  debentures  or  debenture  stock  certifi- 
cate, and  of  the  scrip  where  scrip  is  issued;  certificates  of 
debenture  stock  alloted  to  vendors  in  lieu  of  money  pay- 
ments being  enfaced  "issued  to  vendors.  " 

A  copy  of  the  last  published  Report  and  Accounts. 

The  bankers'  pass  book,  accompanied  by  a  certificate,  on 
a  special  form,  from  the  company's  bankers,  stating  the 
amount  of  deposits  received  by  them  and  the  amount  of 
debentures  or  debenture  stock  on  which  such  deposits  (i.e., 

application  money  only,  being  £ per  debenture)  were 

paid. 

A  statutory  declaration  by  the  chairman  and  secretary, 
stating : 

1 .  That  the  prospectus  complies  with  the  provisions 

of  the  companies  acts,  and  that  all  documents 
required  by  the  companies  acts  have  been 
duly  filed  with  the  registrar  of  joint-stock 
companies,  and  the  dates  of  filing. 

2.  The  amount  of  stock  applied  for  by  the  public. 

3.  The  amount  unconditionally  allotted  to  the  pub- 

lic (Nos _.-.  to ..). 

4.  The  amount,  viz:  £ ,  per  cent,  paid  thereon 

in  cash. 


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National    Monetary     Commission 

5.  The  amount  allotted  for  a  consideration  other 

than  cash  (Nos to ). 

6.  The  total  amount  of  deposits,  and  that  such  de- 

posits are  absolutely  free  from  any  lien. 

7.  That  the  debentures  or  debenture  stock  certifi- 

cates are  ready  for  delivery,  and  that  there  is  no 
impediment  to  the  settlement  of  the  account. 

8.  That  a  trust  deed  has  been  executed  and  com- 

pleted, if  such  be  the  case. 

9.  The  effect  of  such  trust  deed,  and  the  nature  of 

the  charge   created  thereby  in  favor   of    the 
debenture  holders. 

10.  The  total  number  of  allottees. 

11.  The  largest  amount  of  debentures  or  debenture 

stock  (a)  applied  for  by,  and  (6)  allotted  to  any 
one  applicant. 
A  statutory  declaration  by  the  chairman  and  secretary, 
stating : 

1 .  The  total  amount  of  the  authorized  capital  of  the 

company,  and  how  constituted. 

2.  The  number  of  shares  allotted  unconditionally  to 

the  public  (Nos.  to  ),  and  the 

amount  paid  on  each  share  in  cash. 

3.  The  number  of  shares  taken  by  concessionnaires, 

owners  of  property,  contractors  or  other  parties 
.     not  included  in  the  public  allotment  (being 
Nos to. ). 

4.  That  the  share  certificates  have  been  delivered; 

that  the  purchase  of  the  properties  has  been 
completed  and  the  purchase  money  paid. 

SCRIP. 

In  addition  to  the  requirements  made  in  the  case  of 
definitive  stock  or  bonds,  a  specimen  of  the  scrip  certificate 
must  be  supplied. 


142 


The     English     B  (^  n  k  i  n  g    System 

After  the  application  form  has  been  signed  there  must  be 
suppUed  in  the  case  of  further  issues — 

A  king's  printers'  copy  of  the  act  of  ParHament  authoriz- 
ing, resolutions,  etc.,  creating,  and  circular  or  prospectus 
offering,  new  issue. 

If  shares  have  been  issued  credited  as  fully  or  partly 
paid,  certified  printed  copies  of  the  contracts  relating 
thereto. 

A  copy  of  the  allotment  letter. 

A  copy  of  the  last  report  and  accounts. 

A  specimen  of  the  share  certificate. 

The  allotment  book  unless  the  allotment  is  pro  rata. 

A  statutory  declaration  by  the  secretary  stating : 

1 .  That  the  prospectus  or  circular  complies  with  the 

provisions  of  the  companies  acts. 

2.  That  all  documents  required  by  the  companies 

acts  have  been  duly  filed  with  the  registrar  of 
joint  stock  companies,  and  the  dates  of  filing. 

3.  That  the  shares  (Nos to _)  have 

been  applied  for  by  and  unconditionally  allotted 
to  the  shareholders  or  the  public  or  sold  upon 
the  market,  as  the  case  may  be. 

4.  The  amount  per  share  paid  in  cash. 

5.  The  total  number  of  allottees,  and  the  largest 

number  of  shares  applied  for  by  and  allotted  to 
any  one  applicant. 

6.  That  certificates  are  ready  to  be  issued  and  that 

there  is  no  impediment  to  the  settlement  of  the 
account.  It  must  also  be  stated  whether  or 
not  the  shares  are  in  all  respects  identical  with 
those  already  quoted  in  the  official  list. 
The  statement  that  shares  are  in  all  respects  identical 
means  that — 

They  are  of  the  same  nominal  value,  and  that  the  same 
amount  per  share  has  been  called  up. 

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National    Monetary     Commission 

They  carry  the  same  rights  as  to  unrestricted  transfer, 
attendance  and  voting  at  meetings,  and  in  all  other 
respects. 

They  are  entitled  to  di\'idend  at  the  same  rate  and  for 
the  same  period,  so  that  at  the  next  ensuing  distribution 
the  dividend  payable  on  each  share  will  amount  to  exactly 
the  same  sum. 

The  statement  that  stock  is  in  all  respects  identical 
means  that — 

All  the  stock  is  entitled  to  the  same  rights  as  to  unre- 
stricted transfer,  and  in  all  other  respects. 

All  the  stock  is  entitled  to  dividend  at  the  same  rate  and 
for  the  same  period,  so  that  at  the  next  ensuing  distribu- 
tion the  dividend  payable  on  each  £ioo  of  the  stock  will 
amount  to  exactly  the  same  sum. 

After  the  application  form  has  been  signed  there  must 
be  supplied  in  the  case  of  vendors'  shares — 

A  certified  list  of  the  present  holders  of  the  vendors' 
shares. 

A  certified  copy  of  the  last  published  report  and  accounts 
of  the  company. 

A  specimen  of  the  share  certificate. 

A  statutory  declaration  by  the  secretary  stating : 

1.  That  the  vendors'  shares   (Nos.  to  ) 

have  all  been  issued  and  certificates  delivered ; 

2.  That  the  shares  are  in  all  respects  identical  with 

those  already  quoted  in  the  official  list. 

After  the  application  form  has  been  signed  there  must 
be  supplied  in  the  case  of  old  companies — 

The  certificate  of  incorporation,  or  act  of  Parliament, 
and  the  certificate  that  the  company  is  entitled  to  com- 
mence business. 

Authenticated  copies  of  all  concessions  and  similar 
documents,  with  notarially  certified  printed  translations. 


144 


The     English     Banking    System 

Certified  copies  of  all  prospectuses,  original  or  otherwise, 
indorsed  with  the  date  when  first  advertised. 

Two  certified  copies  of  the  memorandum  and  articles  of 
association. 

A  specimen  of  the  share  certificate  and  of  the  allotment 
letter. 

A  certified  copy  of  present  register  of  shareholders. 

Certified  printed  copies  of  contracts,  agreements,  etc., 
together  with  copies  of  all  contracts  relating  to  the  issue  of 
shares  credited  as  fully  or  partly  paid. 

A  certified  copy  of  the  company's  last  published  report 
and  accounts. 

A  short  history  of  the  company,  setting  forth  its  origin, 
progress,  dividends,  etc.,  the  number  of  transfers  registered 
during  the  last  twelve  months,  and  the  number  of  shares 
represented  by  such  transfers. 

Statutory  declaration  by  the  chairman  and  secretary, 
stating  the  following  particulars: 

1.  That  the  prospectus  complied  with  the  provi- 

sions of  the  companies  acts. 

2.  That  all  documents  required  by  the  companies 

acts  have  been  duly  filed  with  the  registrar 
of  joint  stock  companies,  and  the  dates  of 
filing. 

3.  The  number  of  shares  applied  for  by  the  public. 

4.  The  number  of  shares  allotted  unconditionally 

to  the  public   (Nos.  to  ),  and  the 

amount  per  share  paid  thereon  in  cash'. 

5.  The  number  of  shares  allotted  for  a  consideration 

other  than  cash  (being  Nos.  to ). 

6.  That  the  share  certificates  have  been  delivered; 

that  the  purchase  of  the  properties  has  been 
completed  and  the  purchg,se  money  paid. 


»45 


National     Monetary     Commission 

After  the  application  form  has  been  signed  there  must 
be  suppHed  in  the  case  of  colonial  and  foreign  companies — 

The  certificate  of  incorporation,  or  act  of  Parliament,  or 
other  similar  document. 

Two  copies  of  the  statutes  or  articles  of  association  or 
notarial  translations  of  the  same. 

A  certified  list  of  present  shareholders. 

A  specimen  of  the  share  certificate. 

Copies  of  all  agreements,  concessions,  deeds,  etc.,  or 
notarially  certified  printed  translations  of  the  same. 

A  certified  copy  of  last  published  report  and  accounts,  or 
translation  of  the  same. 

Official  evidence  of  quotation  in  the  country  to  which 
they  belong  or  where  the  issue  has  been  made. 

A  short  history  of  the  establishment  and  progress  of  the 
company  from  its  incorporation  to  the  present  time,  includ- 
ing particula,rs  as  to  the  issue  of  the  capital. 

A  declaration  stating — 

1.  The  number  of  shares  allotted. 

2.  The  amount  per  share  paid  in  cash. 

3.  That  the  shares  are  ready  for  delivery,  and  that 

no  impediment  exists  to  the  settlement  of  the 
account. 

After  the  application  form  has  been  signed,  there  must  be 
supplied  in  the  case  of  reconstructed  companies — 

The  certificate  of  incorporation,  and  the  certificate  that 
the  company  is  entitled  to  commence  business. 

A  statement  of  the  plan  of  reconstruction,  together  with 
certified  copies  of  all  resolutions  passed  and  circulars  issued 
in  connection  with  the  reconstruction. 

The  allotment  book,  with  a  summary  signed  by  the  chair- 
man and  secretary. 

The  allotment  letter,  and  the  date  when  posted. 

A  specimen  of  the  share  certificate. 


146 


The     English     Banking     System 

Two  certified  copies  of  the  memorandum  and  articles  of 
association. 

Certified  printed  copies  of  all  contracts,  agreements,  etc. 

Copies  of  all  contracts  relating  to  the  issue  of  fully  or 
partly  paid  shares. 

A  statutory  declaration  by  the  chairman  and  secretary 
stating — 

1.  That  all  documents  required  by  the  companies 

acts  have  been  duly  filed  with  the  registrar  of 
joint  stock  companies  and  dates  of  filing. 

2.  The  authorized  capital  of  the  company. 

3.  The  number  of  shares  to  which  shareholders  in 

the  old  company  were  entitled ;  the  number  and 
distinctive  numbers  of  shares  unconditionally 
allotted  to  such  shareholders;  and  the  amount 
per  share  (a)  paid  thereon  in  cash,  and  (6) 
credited  as  paid  up. 

4.  The  number  and  distinctive  numbers  of  shares 

applied  for  by  and  allotted  unconditionally  to 
the  public,  and  the  amount  per  share  (a) 
credited  as  paid  up,  and  (6)  paid  thereon  in 
cash. 

5.  That  the  share  certificates  have  been  or  are  ready 

to  be  delivered,  and  that  there  is  no  impedi- 
ment to  the  settlement  of  the  account. 

After  the  application  form  has  been  signed  the  following 
documents  must  be  supplied  in  the  case  of  loans — 

Details  of  the  creation  of  the  loan,  and  the  authority 
under  which  it  is  issued,  including  authenticated  copies  of 
concessions,  etc.,  with  notarially  certified  translations. 

The  authority  to  the  agents  or  contractors  to  receive 
subscriptions. 

A  certified  copy  of  the  prospectus. 

Evidence  that  all  bonds  issued  and  payable  abroad  bear 
the  signature  of  some  properly  authorized  person. 


14-7 


National    Monetary     Commission 

A  specimen  bond  together  with  a  bond  duly  executed,  or 
scrip  certificate  if  issued. 

Statutory  declaration  by  the  agents,  stating — 

1.  The    amount    allotted    unconditionally    to    the 

public. 

2.  That  the  required  amount,  viz.,  £ per  cent 

has  been  paid  thereon  in  cash. 

3.  That  the  bonds  are  ready  for  delivery,  and  that 

there  is  no  impediment  to  the  settlement  of 
the  account. 

4.  The  numbers  and  denominations  of  those  bonds 

which  bear  the  autographic  signature  of  the 
London  agents  or  contractors. 

After  the  application  form  has  been  signed  the  following 
documents  must  be  supplied  in  the  case  of  bonds  quoted 
abroad — 

Official  evidence  of  quotation  in  the  country  to  which 
they  belong  or  where  the  issue  has  been  made. 

Notarially  certified  printed  translations  of  all  prospec- 
tuses, and  of  the  laws  creating  and  authorizing  the  loan. 

A  specimen  bond,  together  with  a  bond  duly  executed. 

An  official  certificate  setting  forth — 

1.  The  authorized  and  issued  amounts  of  the  loan, 

and  the  terms  of  issue. 

2.  The  distinctive  numbers  and  denominations  of 

the  bonds. 

3.  Evidence  that  all  bonds  bear  the  signature  of 

some  properlv  authorized  person. 


148 


THE  HISTORY  OF  THE  SEPARATION  OF 
THE  DEPARTMENTS  OF  THE  BANK  OF 
ENGLAND. 

By  Sir  R.  H.  Ingus  Palgrave,  F.  R.  S. 


Chapter  I. 

HISTORY  OF  THE  SEPARATION. 

The  separation  of  the  issue  department  from  the  banking 
department  of  the  Bank  of  England  was  carried  into  effect 
so  many  years  since  (it  dates  from  the  passing  of  the  bank 
act  by  Sir  Robert  Peel,  in  the  year  1844)  that  hardly  any- 
one now  living  can  remember  the  time  before  the  change 
was  made,  when  the  accounts  did  not  appear  as  they  do  at 
present.  The  form  of  statement  now  published  weekly 
appears  probably  to  many  of  those  who  study  it  as  the 
plan  on  which  the  statement  of  a  note-issuing  bank  would 
naturally  be  drawn  up,  and  they  are  hardly  aware  that  the 
Bank  of  England  is  practically  the  only  bank  that  follows 
or  ever  has  followed  this  method  of  keeping  its  accounts. 
Before  the  year  1844  the  accounts  of  the  Bank  of  England 
were  drawn  up  on  the  form  followed  at  the  present  time 
by  the  Bank  of  France,  the  Bank  of  Germany,  the  Bank  of 
the  Netherlands,  the  Bank  of  Belgium,  and,  indeed,  by  all 
the  other  great  issuing  banks  of  the  world.*  I  add,  to 
make  this  point  clear,  the  balance  sheet  of  the  Bank  of 
England — both  according  to  the  ordinary  weekly  state- 
ment and  arranged  to  correspond  with  the  forms  employed 
by  the  other  banks — and  the  balance  sheets  of  the  banks 
of  France,  of  Germany,  of  the  Netherlands,  and  of  Bel- 


149 


National    Monetary     Commission 

gium.  The  return  of  the  Bank  of  England  is  of  January 
6,  1910.  The  dates  of  the  balance  sheets  of  the  other 
banks  are  stated  on  them.  The  weekly  publications  of 
these  banks  do  not  give  all  the  details  required.  Hence 
I  have  thought  it  well  to  give  the  annual  balance  sheets  of 
these  banks.  No  other  statement  than  the"  weekly  returns 
is  published  by  the  Bank  of  England. 

BANK   OF  ENGLAND. 
ISSUE  DEPARTMENT. 


LIABILITIES. 


Notes  issued. 


£51 , 241 , 210 


Government  debt £11,  015,  100 

Other  securities 7,  434,  900 

Gold  coin  and  bullion 32.791.  210 


SI, 241 , 210 
BANKING  DEPARTMENT. 


SI,  241,  210 


Proprietors'  capital £14,553,000 

Rest 3.360,  I S4 

Public  deposits  " 9.936,777 

Other  deposits 49, 139, 180 

Seven-day  and  other  bills 18,046 


77,007,  157 


Government  securities £17,  50 7,  945 

Other  securities 36,  211.  089 

Notes 22,375,  490 

Gold  and  silver  coin 912,  633 


77,  007,  157 


a  Including  excheciiier,  savings  banks,  commissioners  of  national  debt,  and  dividend 
accounts. 

J.  G.  Nairne.  Chief  Cashier. 
Dated  January  6,  19 10. 

The  above  is  the  statement  as  it  appears  in  the  weekly 
returns. 

Balance  sheet,  January  6,  igio. 

[Arranged  so  that  it  corresponds  in  form  with  the  balance  sheets  of  the  other  banks 

given  here.] 


LIABILITIE.S. 


Capital  and  rest.^ £17,  913,  154 

Notes  in  circulation 28,  865,  720 

Seven-day  and  other  bills 18,046 

Public  deposits 9,  936,  777 

Other  deposits 49,  139,  180 


los,  872.  877 


Gold   coin    and   bullion    and 

silver  coin £33,  703,  843 

Government      securities      in 

both  departments 28,523,04s 

Other  securities 43,  654,  989 


105,  872,  877 


Note. — All  per  contra  entries,  as  those  of  the  notes  of  the  banks  held  by  themselves, 
etc.,  are  omitted,  so  as  to  show  the  real  position  of  the  accounts. 


150 


The      English       Banking      Sy  stem 


BANK  OF  FRANCE. 

Balance  sheet,  December  ji,  igo8. 


[Francs  converted  as  2s  =  £i.] 


LIABILITIES. 

Capital  of  the  bank 

Reserve  and  profits  in  ad- 
dition to  capital 

Notes  payable  to  bearer  in 
circulation     (head     oiBce 

and  branches) 

Drafts 

Current    account    witli    the 

treasurj' 

Current    accounts    and    de- 
posit accounts: 

Paris £22.780,727 

Branches        2.721,524 


Dividends  unpaid,  etc. 


£7, 300. 000 
I, 700, 774 


197,972.403 
914, 397 


25,  502,  251 
1,876.386 


242, 46s, 702 


ASSETS. 


Coin    and   bullion   at    Paris 

and  at  the  branches £  i 

Bills   due   yesterday    to   be 

received  this  day 

Amount  of  bills: 

Paris £9,920,192 

Branches.    18.886,626 


Advances  on  securities: 

Paris £6,332,341 

Branclies-    14.478,603 


Advances  to  Government 
(laws  of  June  9,  1857, 
June  13,  1878,  November 
17,  1897) 

Government  stock  reserve 
fund 

Disposable  funds,  govern- 
ment stock 

Immovable  funds,  govern- 
ment stock  (law  of  June 
9,  1S57) 

Amount  appropriated  to 
special  resers-e 

Office  and  furniture  of  the 
bank  and  buildings  at  the 
branches,  etc 


Note. — All  per  contra  entries,  as  those  of  the  notes  of  the  banks  held  by 
etc.,  are  omitted  so  as  to  show  the  real  position  of  the  accounts. 

IMPERIAL  BANK  OF  GERMANY. 

Balance   sheet,  December  ji,  igo8. 
[Marks  converted  as  20=  £1.] 


75,401,607 
I.  757 

28,806,818 

20, 810, 944 

7, 200, 000 

S19,  230 

3,98s, 234 

4, 000, 000 
336,298 


!42.  465,  702 

themselves, 


liabilities. 

Capital  and  reserve £12,  458,  581 

Notes  in  circulation 98,  771,  474 

Amount  due  on  clearing  and 

current  accounts 33,  244,  291 

Deposits  (not  bearing  inter- 
est)   25,167 

Sundry  liabilities  and  reserve 

for  doubtful  debts 720,072 

Net  profits  for  1907 i.  537.  287 


146, 756, 872 


assets. 

Gold  in  bars £16,  792,  075 

German      gold 

coin 21,  620, 


£38,412,973 
Divisional  money 10,  594,  046 


Notes    of    imperial    treasury 

(Reichskassenscheinen) 

Notes  of  other  banks 


49,  007,  019 

2.876,  243 
505. 105 


Bills  held: 

Due  within  1 5  days 22,660,590 

Due  at  later  dates 28,939,529 


Bills  on  foreign  places. 


51. 600, 119 
6.457.493 


58,057,  612 
Loans 8,  796,  468 

Securities 19,724,627 

Value    of   real    property   be- 
longing to  the  bank 2,849,450 

Sundry  assets 4.  940,  348 


146, 756, 872 


Note. — All  per  contra  entries,  as  those  of  the  notes  of  the  banks  held  by  themselves, 
etc.,  are  omitted  so  as  to  show  the  real  position  of  the  accounts. 


151 


National     Monetary     Commission 


BANK  OF  THE  NETHERLANDS. 

Balance  sheet,  March  31,  igog. 

[Guilders  converted  as  i2  =  £i.] 


LIABILITIES. 

Capital £1.666,667 

Reserve 4,?S.9SS 

Notes  in  circulation 22,  798,  206 

Transfers 173,200 

Current  accounts 539,  849 

Discount  on — 

Inland  bills 10,521 

Foreign  bills 3.060 

Sundry  liabilities 59,  598 

Net  profit  for  distribution 90,360 


25. 777. 416 


ASSETS. 

Coin,  bullion,  etc £13.  665,  502 

Inland  bills 3.  514,  247 

Foreign  bills i.  55°. 309 

Loan  accounts 4, 144,  246 

Advances     on     current     ac- 
counts   I,  882,  021 

Investments; 

Capital 332,662 

Reserve    432,708 

Sundry  assets,  buildings 255,  721 


25. 777. 416 


Note. — All  per  contra  entries,  as  those  of  the  notes  of  the  banks  held  by  themselves, 
etc.,  are  omitted  so  as  to  show  the  real  position  of  the  accounts. 

NATIONAL  BANK  OF  BELGIUM. 

Balance  sheet,  December  ji,  igoS. 

[Francs  converted  as  25  =  £i.] 


LIABILITIES. 

Capital  paid  up £2,  000,  000 

Reserve  fund 1,444,  899 

Notes  in  circulation 32,275.122 

Current  accounts 4,  028,  662 

Stamp  duty,  share  of  profits 

due    to    the    Government, 

employees  superannuation, 

provident  funds,  dividends 

due,  etc i, 029,  776 


40, 778, 459 


ASSETS. 

Specie  and  bullion £6,  326,  529 

Bills  discounted  o, 27.159,971 

Securities  due  for  collection.  193,  849 
Advances  on  government  se- 
curities   2, 056, 765 

Government  and  reserve  fund 

securities 3,  418,  343 

Securities     for     current     ac- 
counts, etc 1,623.002 


40, 778, 459 


a  Bills  in  Belgium,  £19,738,332;   foreign  bills,  £7,421,639.      Total,  £27,159,971. 

Note. — All  per  contra  entries,  as  those  of  the  notes  of  the  banks  held  by  themselves, 
etc.,  are  omitted  so  as  to  show  the  real  position  of  the  accounts. 

I  will  now  endeavor  to  explain  the  reasons  which  in- 
duced Sir  Robert  Peel,  who  was  the  author  of  the  Bank 
Acts  of  1844-45,  the  acts  which,  as  far  as  the  issue  of  notes 
is  concerned,  govern  the  banking  system  of  the  United 
Kingdom  at  the  present  date — and  incidentally  the  amount 
of  the  notes  held  in  the  Banking  Department,  which 
forms  the  reserve  of  the  Bank  of  England — to  make 
this  alteration  and  to  overcome,  as  he  had  to  do,  all  the 
objections  which  were  felt  by  most  of  the  business  men  and 
the  economists  of  his  time  to  the  great  change  that  he  thus 
introduced  in  the  method  of  the  statement  of  the  accoimts 


152 


The      English      Banking      System 

of  the  Bank  of  England,  which  is  the  very  center  and  heart 
of  the  banking  system  of  Great  Britain.  The  division  of 
the  two  departments  is  not  only  the  outward  sign  of  a 
great  change  in  the  method  of  conducting  one  large  por- 
tion of  its  business,  which  Sir  R.  Peel  introduced,  but  it 
provides  the  machinery  by  which  that  change  is  carried 
into  effect — a  change  which  affects  the  course  of  business 
in  a  very  material  way. 

The  primary  reason  which  induced  Sir  Robert  Peel  to 
adopt  this  arrangement  is  to  be  found  in  the  fact  that  he 
was  a  great  supporter  of  that  form  of  opinion  respecting 
the  influence  of  the  paper  currency  of  the  country  on  busi- 
ness in  general,  which  is  known  under  the  name  of  the 
"Currency  principle."  As  the  expressions  of  opinion  on 
this  point  go  back  to  a  period  considerably  earlier  than 
the  introduction  of  the  Bank  Act,  and  many  years  have 
hence  passed  since  this  subject  was  originally  discussed  by 
business  men  and  economists,  it  will  be  necessary  to 
explain  the  meaning  of  the  term  before  proceeding  fur- 
ther. One  of  the  best  descriptions  of  the  theory  is  to  be 
found  in  the  "Investigations  in  Currency  and  Finance" 
of  Prof.  W.  Stanley  Jevons,  published  in  1884.  The  cur- 
rency theory,  he  states,  "  atti-ibutes  every  fluctuation  of 
prices  to  an  extension  of  the  bank-note  circulation " 
(P-  33)-  Jevons  refers  (p.  107  of  the  same  book)  to  the 
subject  again:  "It  was  the  mistaken  notion  of  some  few 
persons  that  convertible  Bank  notes  might  have  a  peculiar 
efficacy  in  regulating  prices  and  sowing  the  seeds  of  fluc- 
tuations." Although  those  who  held  this  opinion  were 
at  that  period  comparatively  few  in  number,  they  were 


153 


National    Monetary     Commission 

sufficiently  powerful  to  cause  their  opinions  to  influence 
the  legislation  of  the  time.  Another  description,  given  by 
Mr.  William  Newmarch  in  his  address  as  president  of  the 
Section  of  Economic  Science,  at  the  meeting  of  the  British 
Association,  Manchester,  1861,  will  also  be  of  service,  as 
it  puts  the  subject  before  us  from  a  different  point  of 
view.  "There  used  to  be  received,  with  scarcely  any  dis- 
sentients, three  principal  doctrines  relating  to  a  Con- 
vertible Paper  Currency.  It  used  to  be  held  that  fluc- 
tuations in  the  amount  of  bank  notes  in  the  hands  of  the 
public  operated  in  some  direct  manner  on  prices — that 
consequently  the  convertible  paper  currency  must  be 
properly  regulated,  so  that  vicious  fluctuations  of  prices 
might  be  prevented — and  thirdly,  that  what  were  called 
appreciation  and  depreciation  of  the  currency,"  and-  not 
the  operations  of  supply  and  demand,  and  capital  and 
credit,  govern  the  foreign  exchanges  and  produce  over- 
trading and  lead  to  financial  disasters  and  panics." 

"But,"  Mr.  Newmarch  continues,  "by  a  persevering 
and  systematic  application  of  the  test  of  observation 
and  experiment,  it  has  been  proved,  by  evidence  so  exten- 
sive and  various  that  we  may  well  claim  for  it  the  force 
of  a  demonstration — first,  that  fluctuations  in  the  amount 
of  a  paper  circulation  strictly  convertible  into  coin  does 
not  govern  prices  at  all,  but  that  prices  are  governed  by 
supply  and  demand,  and  by  operations  of  capital  and 
credit.  Second,  that  due  and  rigid  enforcement  of  cash 
payment  is  the  only  wholesome  regulation  which  a  paper 

a  In  speaking  thus  of  the  "appreciation  and  depreciation  of  the  cur- 
rency," Mr.  Newmarch  obviously  referred  to  what  he  had  just  mentioned, 
"  the  convertible  paper  currency." 


154 


The      English      Banking      System 

circulation  requires — and,  thirdly,  that  bank  notes  are  no 
more  than  the  mere  small  change  of  the  ledger,  and  that 
the  phenomena  which  are  really  worth  attention  are  not 
infinitesimal  fluctuations  in  the  amount  of  bank  notes, 
but  changes  in  the  rate  of  interest."  (Address  of  Mr. 
William  Newmarch,  printed  in  the  Journal  of  the  Statis- 
tical Society  of  London,  December,  1861,  vol.  xxiv,  pp.' 
463-464.)  The  importance  of  this  treatise  is  recognized 
by  foreigners  as  well  as  by  our  own  authorities.  In  refer- 
ence to  this  I  have  quoted  further  on  the  opinions  of  Dr. 
N.  G.  Pierson,  the  well-known  Dutch  economist,  who  was 
at  one  time  Governor  of  the  Bank  of  the  Netherlands,  on 
the  subject. 

I  have  described  above  the  general  principles  which 
those  who  held  the  currency  principle  or  theory  main- 
tained. It  now  remains  to  explain  the  opinions  of  those 
who  held  the  "banking  principle."  To  describe  this  we 
shall  in  the  first  place  quote  from  the  writings  of  Mr. 
Thomas  Tooke,  who  maintains  "  that  the  theory  of  the 
currency  principle,  according  to  the  exposition  of  its  pro- 
mulgators, involves  the  error  of  confounding  converti- 
ble with  inconvertible  paper;  as  regards  its  issue,  and  its 
effects  in  circulation  up  to  the  point  of  its  convertibility." 

Mr.  Tooke  continues:  "By  the  same  authorities  it  is 
assumed,  as  an  axiom,  that  a  purely  metallic  circulation 
is  the  type  or  model  of  a  perfect  currency ;  and  that,  there- 
fore, a  mixed  circulation  of  coin  and  paper  ought  to  be 
made  to  conform  in  amount  to  the  same"  variations  as 
would  be  incidental  to  a  purely  metallic  currency.  I,  and 
those  who  with  me  are  opposed  to  the  doctrine  of  the 


155 


National    Monetary     Commission 

currency  theory,  as  adopted  by  Sir  Robert  Peel  and  em- 
bodied in  the  act  of  1844,  readily  admit  so  much  of  it  as 
relates  to  this  assumption."  With  regard  to  the  banking 
system  Mr.  Tooke  says:  "We  are  willing  to  consider  a 
metallic  currency  as  the  type  of  that  to  which  our  mixed 
circulation  of  coin  and  paper  ought  to  conform;  but, 
further,  we  contend  that  it  has  so  conformed,  and  must 
so  conform,  while  the  paper  is  strictly  convertible." 
(Tooke's  History  of  Prices,  vol.  iv,  p.  218.) 

Having  thus  given  a  rough  sketch  of  the  two  theories 
respecting  the  issue  of  notes  which  prevailed  in  the  time 
of  Sir  Robert  Peel,  of  which  the  one  which  is  termed 
the  "Currency  Theory"  is,  as  mentioned  before,  the  basis 
of  the  Bank  Act  of  1844,  I  will  go  on  with  the  history 
of  the  changes  which  he  made  in  the  management  of  the 
Bank  of  England. 

The  discussions  respecting  the  separation  of  the  two 
departments  of  the  note  issue  and  of  banking,  which 
took  place  in  the  year  1844,  go  back  at  least  as  far  as 
1832,   1836,  and   1837. 

The  particular  form  according  to  which  the  restric- 
tions of  the  note  circulation  of  the  Bank  of  England 
was  carried  out  in  the  Act  of  1844  had  been  thought  of 
several  years  earlier  by  the  directors  of  the  Bank  of 
England,  as  is  shown  in  the  extracts  from  their  evidence 
given  before  committees  of  the  House  of  Commons  which 
follow. 

There  had  been  at  a  somewhat  earlier  date  much 
fluctuation  in  money  matters,  partly  arising  from  the 
disturbed    state    of    Europe    toward    the    close    of    the 


156 


The      English      Banking-      Sy  stem 

eighteenth  century,  the  wars  in  which  England  was 
engaged,  and  the  suspension  of  specie  payments  which 
took  place  in  1797.  Business  gradually  returned  to  more 
normal  conditions  and  cash  payments  were  resumed  in 
1823,  permission  having  been  given  to  the  bank  to  defer 
doing  so  to  1825  had  this  been  necessary.  (Committee  on 
the  Bank  Charter  in  1832.) 

The  advisability  of  a  restriction  on  the  issue  of  notes 
was  maintained  by  Sir  Robert  Peel  in  the  debates  of  the 
House  of  Commons  on  the  Bank  Act;  the  subject  is  per- 
haps explained  more  clearly  in  his  speech  of  April  25, 
1845.  His  words  were:  "With  regard  to  the  Bank  of 
England,  the  limitation  imposed  upon  the  issues  of  the 
bank  on  securities  was  £14,000,000.  The  bank  was  per- 
mitted to  issue  promissory  notes  to  the  extent  of 
£14,000,000  on  securities;  but  in  regard  to  any  addi- 
tional issue,  that  issue  could  only  take  place  on  specie, 
the  public  being  entitled  to  demand  notes  in  exchange  for 
specie,  or  coin  in  exchange  for  notes,  and  the  whole  of 
the  circulation  of  the  Bank  of  England  beyond  £14,000,000 
being  determined  by  the  free  action  of  the  public  demand- 
ing either  notes  or  gold,  as  they  might  require.  With 
regard  to  the  issues  of  the  other  banking  establishments 
(in  England  and  Wales),  the  provision  made  was  this — 
that  in  respect  to  every  private  bank  of  issue,  or  joint- 
stock  bank  of  issue,  an  average  amount  of  its  circulation 
for  the  twelve  weeks  preceding  the  27th  April,  1844,  was 
taken;  and  those  banks  were  required  to  confine  their 
future  issues  of  their  own  paper  within  that  limit.  There 
was  no  prohibition  to  their  increase  of  the  issue  of  promis- 


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National    Monetary     Commission 

sory  notes,  provided  that,  beyond  the  prescribed  hmit, 
the  issues  should  be  of  Bank  of  England  paper,  that  Bank 
of  England  paper  being  founded  on  gold.  I  apprehend 
that  the  House  sanctioned  these  measures  on  the  follow- 
ing assumptions: — That  the  standard  value,  or  standard  of 
value,  in  this  country  is  a  certain  quantity  of  gold,  definite 
in  point  of  weight,  and  definite  in  point  of  fineness;  and 
that  a  promissory  note  being  an  undertaking  to  pay  a 
pound,  the  issuer  is  bound  to  deliver  neither  more  nor 
less  to  the  holder  of  that  note  than  a  definite  quantity  of 
gold  of  a  definite  degree  of  fineness.  The  House  as- 
sumed, too,  that  the  issue  of  that  promissory  paper  might 
fairly  be  subject  to  regulations  to  which  other  forms  of 
paper  credit  need  not  necessarily  be  subject;  that  the 
issue  of  promissory  notes  representing  gold,  and  acting  as 
substitutes  for  gold,  differed  in  character  and  effect  from 
other  forms  of  paper  credit;  that  those  who  issued  them 
were  in  possession  of  a  valuable  privilege — valuable  to 
themselves,  and  important  to  the  country ;  and  that  this 
House  had  a  perfect  right  at  any  time  to  subject  the 
issuers  of  that  paper  to  such  restrictions  as  might  be 
deemed  expedient  for  the  public  good.  There  was  another 
assumption  on  which  the  House  also  acted,  that  with  a  per- 
fectly unregulated  competition  in  the  issue  of  paper,  there 
was  no  necessary  guarantee  for  the  permanence  of  the 
convertibility  of  that  paper,  or,  I  should  rather  say,  that 
though  there  might  be  the  guarantee  of  permanent  con- 
vertibility, yet  there  was  no  guarantee,  where  competi- 
tion was  perfectly  unrestricted  and  unlimited,  against  the 
occasional  necessity  of  sudden  and  violent  contractions  of 


158 


The      English      Banking      Sy  stem 

the  circulation,  leaving,  indeed,  the  note  convertible  into 
gold,  but  deranging  the  monetary  transactions  of  the 
country,  and  shaking  all  confidence  in  private,  and  even 
in  public  credit." — Sir  Robert  Peel  had  already  referred  to 
the  subject  on  May  6,  1844.  He  then  said:  "I  therefore 
propose,  with  respect  to  the  Bank  of  England,  that  it 
should  continue  in  possession  of  its  present  privileges  of 
Issue,  but  that  there  should  be  a  complete  separation  of 
the  business  of  banking  from  that  of  Issue;  that  there 
should  be  a  department  of  Issue  separate  from  the  depart- 
ment of  Banking,  with  separate  officers  and  separate 
accounts.  I  propose  that  to  the  Issue  department  should 
be  transferred  the  whole  amount  of  bullion  now  in  posses- 
sion of  the  Bank,  and  that  the  Issue  of  Bank  Notes  should 
hereafter  take  place  on  two  foundations,  and  two  founda- 
tions only — first,  on  a  definite  amount  of  public  securi- 
ties; secondly,  exclusively  upon  bullion.  The  action  of 
the  public  will  regulate  the  amount  of  that  portion  of  the 
note  circulation  which  is  issued  upon  bullion.  With 
respect  to  the  banking  business  of  the  Bank,  I  propose  that 
it  should  be  governed  on  precisely  the  same  principles  as 
would  regulate  any  other  Body  dealing  with  Bank  of 
England  notes.  The  fixed  amount  of  securities  on  which 
I  propose  that  the  Bank  of  England  should  issue  notes  is 
£14,000,000,  the  whole  of  the  remainder  of  the  circula- 
tion to  be  issued  exclusively  on  the  foundation  of  bullion." 
I  had  better  at  this  point  recapitulate  the  history  of  what 
occurred  at  this  period.  It  was  a  favorite  opinion  of  the 
advocates  of  the  Bank  Act  of  1844  that  the  immediate 
result  of  the  division  of  the  business  into  the  two  depart- 

76651—10 II  159 


National    Monetary     Commission 

ments,  issue  and  banking,  would  be  to  deprive  the  bank  at 
once  of  the  power  and  the  responsibility  of  "regulating  the 
currency."  The  issue  of  notes  being  placed  under  the 
restrictions  explained  in  the  speech  of  Sir  Robert  Peel  of 
May  6,  1844,  from  which  I  have  just  quoted,  the  bank  was 
to  be,  with  reference  to  all  its  other  business,  in  a  position 
as  free  as  that  of  any  other  banking  company. 

The  cause  of  these  restrictions  was,  as  I  have  said,  the 
belief  "that  by  an  expansion  or  contraction  of  the  issues 
of  bank  notes  at  pleasure,  the  prices  of  commodities  can  be 
increased  or  diminished."  This  theory  was  based  on  the 
idea  that  banks  could  issue  notes  to  a  larger  amount  than 
the  necessities  of  the  country  required,  and  that  these 
notes  would  remain  in  circulation  indefinitely.  This  idea 
had  gained  acceptance  during  the  period  of  an  inconverti- 
ble currency  of  Bank  of  England  notes  which  lasted  while 
the  suspension  of  specie  payments  was  continued  (1797- 
1823)  and  was  associated  also,  without  proper  considera- 
tion, with  the  influence  of  a  convertible  currency.  As  a 
convertible  currency  can  be  immediately  exchanged  for 
coin  it  can  not  be  supposed  that  any  notes,  not  actually 
required  for  use,  would  remain  in  circulation  at  all,  as  those 
persons  who  held  them  would  pay  them  in  to  their  accounts 
with  their  bankers  and  the  bankers  in  their  turn  would 
convert  ,them  into  money. 

To  understand  the  question  thoroughly  is  of  very  great 
importance,  as  on  it  were  based  that  change  in  the  arrange- 
ments of  the  Bank  of  England  which,  as  has  been  men- 
tioned above,  led  to  the  division  of  the  two  departments 
of  "issue"  and  of  "banking"  and  also  that  line  of  argu- 


160 


The      English      Banking      System 

ment  which  maintains  that  the  whole  of  the  note  circula- 
tion of  the  country  ought  to  be  centered  on  one  single  bank 
of  issue. 

The  grounds  on  which  Sir  Robert  Peel  acted  received  a 
good  deal  of  criticism  at  the  time,  particularly  from  Mr. 
Thomas  Tooke  and  Mr.  William  Newmarch.  (Mr.  New- 
march  was  for  many  years  the  secretary  and  manager  of 
Glyn's  Bank.)  They  were  summarized  by  the  Right  Hon. 
James  Wilson  in  his  work  on  Capital,  Currency,  and  Bank- 
ing, under  five  heads — "Five  assumptions,"  Mr.  Wilson 
calls  them,  as  he  does  not  consider  that  any  one  of  them 
was  proved. 

''First,  That  bank  notes  though  payable  in  coin,  at  the 
option  of  the  holder,  are  still  liable  to  be  issued  in  excess, 
and  are  consequently  subject  to  depreciation. 

"Second,  That  convertibility  is  not  alone  a  sufficient 
guarantee  that  a  mixed  currency  of  bank  notes  and  coin 
shall  conform,  in  its  variations,  to  the  same  laws  that 
would  regulate  a  purely  metallic  currency. 

"Third,  That  issuers  of  bank  notes  have  power  to  increase 
or  decrease  the  circulation  at  pleasure. 

''Fourth,  That,  by  expansion  or  contraction  of  the  issues 
of  bank  notes  at  pleasure,  the  prices  of  commodities  can 
be  increased  or  diminished;  and, 

"Fifth,  That,  by  such  increase  or  diminution  of  prices, 
the  foreign  exchanges  will  be  corrected,  and  an  undue 
influx  or  efflux  of  bullion,  as  the  case  may  be,  will  be 
arrested. 

I  believe,  with  Mr.  Wilson,  that  these  "five  proposi- 
tions fairly  represent  the  principles  involved  in  Sir  Robert 


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National    Monetary     Commission 

Peel's  measure."  Having  stated  these  opinions,  I  must 
now  go  on  with  the  history.  I  have  endeavored  to  show 
that  the  principles  on  which  the  "currency  theory"  is 
based  do  not  correctly  represent  the  circumstances  in  the 
case  of  a  note  issue  carried  on  with  absolute  convertibility 
at  pleasure,  and  that  they  have  hence  no  foundation 
whatever  on  fact.  I  have  also  endeavored  to  trace  the 
reasons  which  apparently  had  led  Sir  Robert  Peel  to 
adopt  this  line  of  argument.  While  stating  this,  I  would 
desire  most  carefully  to  guard  against  appearing  to  have 
any  sympathy  with  those  who  desire  to  weaken  in  any 
way  the  immediate  convertibility  of  the  note  circulation 
at  the  option  of  the  holder. 

Having  thus  explained  Mr.  Wilson's  opinions,  I  can  now 
continue  the  history  of  the  circumstances  under  which 
the  separation  of  the  two  departments  of  "issue"  and 
"banking"  took  place.  I  referred  on  a  previous  page  to 
the  fact  that  the  origin  of  this  idea  appears  to  date  a  con- 
siderable distance  further  back  than  the  Act  of  1844,  and 
to  have  been  connected  with  the  arrangement  spoken  of 
by  Mr.  G.  W.  Norman  in  his  evidence  before  the  Com- 
mittee of  the  House  of  Commons  on  the  Bank  Charter 
(1832),  that  the  Bank  desired  in  the  regular  course  of 
business  "to  keep  the  general  amount  of  securities  about 
on  a  level."  (This  statement  occurs  in  answer  2452.) 
Mr.  Norman  was  asked  in  question  2459:  "You  state 
that  the  present  principle  of  the  Bank  is,  that  having  a 
certain  amount  of  liabilities  consisting  of  notes  and  of 
deposits,  you  thought  it  a  proper  principle  to  maintain 
one-third  of  that   in   bulHon   in   ordinary  times?"     Mr. 


162 


The      English      Banking      System 

Norman  proceeded  to  explain  this  by  replying  that  this 
principle  applied  "at  a  period  when  the  currency  is  full," 
and  further  went  on  to  "  describe  the  currency  as  being  full 
when  the  Exchanges  were  at  par,  or  rather  on  the  point 
of  becoming  unfavorable."  This  idea,  that  of  retaining 
the  securities  at  a  fixed  point,  became  rooted  in  the  minds 
of  those  in  whose  hands  the  direction  of  the  bank  lay.  It 
was  expressed  very  clearly  by  Mr.  J.  Horsley  Palmer,  the 
governor  of  the  Bank  of  England,  when  he  was  examined, 
as  also  was  Mr.  Norman,  one  of  the  directors,  before  the 
Committee  of  1832,  that  the  principle  of  the  proportion 
of  keeping  the  amount  of  one-third  of  the  liabilities  in 
bullion  was  the  proper  one  to  follow.  In  reckoning  the 
liabilities,  the  deposits  were  included  by  Mr,  Palmer,  as 
well  as  the  circulation.  This  appears  to  have  been  the 
first  idea.  But,  as  time  went  on,  the  notes  became  con- 
sidered as  the  proper  object  of  protection,  rather  than  the 
liabilities  in  the  way  of  deposits.  Thus,  when  Sir  Robert 
Peel  had  to  consider,  in  1844,  the  question  of  the  renewal 
of  the  bank  charter,  he  found  this  arrangement  for  a 
division  of  the  two  departments  ready  to  his  hand.  He 
found  also  a  stout  supporter  in  Lord  Overstone  (then  Mr. 
S.  Jones  lyoyd),  who,  both  in  his  evidence  before  the 
Select  Committee  of  the  House  of  Commons  on  Banks  of 
Issue,  in  1840,  in  several  pamphlets,  in  letters  addressed 
to  the  Times  newspaper,  and  by  all  the  means  in  his 
power,  strove  to  influence  the  public  mind  toward  the 
separation  of  the  two  departments.  In  these  pamphlets 
Mr.  S.  Jones  Loyd  criticised  the  management  of  the  circu- 
lation at  various  periods,  both  before  1839  and  during  that 


163 


National    Monetary     Commission 

year.  Nothing  is  more  striking  in  reading  these  remarks 
than  the  manner  in  which  the  circulation  is  spoken  of,  and 
the  great  importance  which  is  ascribed  to  the  necessity  of 
regulating  it  so  as  to  influence  the  foreign  exchanges. 

As  I  gave  above  the  observations  made  by  Mr.  James 
Wilson  on  the  Act  of  1844,  it  will  be  advisable  to  contrast 
these  with  Mr.  S.  Jones  Loyd's  arguments  in  favor  of  the 
alteration. 

"The  only  object  of  the  proposed  separation  of  the 
departments  of  the  Bank  of  England  is  to  obtain  an 
effectual  security  for  the  regulation  of  the  amount  of  the 
paper  circulation  of  the  country  in  correspondence  with 
the  fluctuations  of  the  bullion;  such  regulation  being 
deemed  to  be  essential  for  the  certain  maintenance, 
under  all  circumstances,  of  the  convertibility  of  paper 
issues  into  specie. 

"The  present  union  of  banking  functions  with  man- 
agement of  the  circulation,  not  only  in  the  same  parties, 
but  in  the  same  system  of  accounts,  is  deemed  to  be 
incompatible  with  the  accomplishment  of  this  object, 
for  the  following  reasons : 

"i.  Because  the  paper  circulation  is  thus  issued  upon 
mercantile  securities,  and  there  is,  therefore,  a  very 
strong  tendency  to  increase  its  amount  with  rising  prices 
and  to  diminish  its  amount  with  falling  prices;  which  is 
the  reverse  of  what  would  take  place  with  a  metallic 
circulation. 

"2.  Because,  as  the  issuers  also  receive  deposits  as  well 
as  issue  notes,  they  are  subjected  to  a  strong  temptation 


164 


The      English      Banking      System 

to  meet  the  demand  of  depositors  by  an  improper  increase 
of  paper  issues  instead  of  a  realization  of  securities. 

"3.  Because  the  connection  of  the  issuers  with  trade 
and  commerce  creates  a  strong  inducement  to  aid  and 
support  pubHc  and  mercantile  credit,  during  a  period  of 
pressure,  by  improper  increase  of  issues. 

"4.  Because  the  mismanagement  of  the  circulation 
seems  in  almost  all  cases  to  be  distinctly  traceable  to 
these  causes. 

"5.  Because  the  union  of  the  two  functions,  of  circu- 
lation and  deposit,  is  found  to  cause  inevitable  confusion 
both  in  reasoning  and  in  action.  This  appears  in  the 
measures  of  the  Bank  of  England  and  in  the  defence 
which  has  been  made  of  them — similarly  as  regards  the 
country  issues'^ — in  the  confusion  of  ideas  prevalent 
amongst  the  public  respecting  the  connection  between  the 
amount  of  circulation  and  the  amount  of  liabiHties." 

With  these  remarks  of  Mr.  S.  Jones  Loyd,  it  is  well  to 
compare  those  of  Sir  Robert  Peel,  in  his  speech  of  the  6th 
of  May,  1844,  on  the  renewal  of  the  Bank  Charter,  as  they 
give  the  detail  of  the  plan  of  keeping  the  accounts  of  the 
bank  which  has  been  followed  to  the  present  time : 

"  I  have  stated  that  the  issues  of  the  Bank  are  to  be  upon 
bullion  and  upon  a  fixed  amount  of  securities.  We  pro- 
pose that  £14,000,000  should  be  that  amount  of  securities. 
Seeing  no  advantage  in  a  change,  we  propose  to  con- 
tinue upon  the  present  terms  the  existing  loan  of 
£11,000,000  made  by  the  Bank  to  the  Government,  at  3 

oThe  "country  issues"  were  the  notes  issued  by  the  provincial  Banks  of 
England  and  Wales  at  that  period.  They  amounted  in  1845  to  £7,700,000, 
having  been  considerably  larger  in  previous  years. 


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National    Monetary     Commission 

per  cent.  This  debt  of  the  Government  to  the  Bank  is  to 
be  assigned  as  part  of  the  security  on  which  the  issues 
of  the  Bank  are  to  take  place.  There  will  then  remain 
£3,000,000  of  additional  securities,  Exchequer  Bills  or 
other  securities,  over  which  the  Bank  is  to  have  entire 
control.  We  propose  that  the  Bank  should  have  a  right, 
in  case  of  necessity,  to  limit  its  issues  upon  that  portion 
of  the  securities,  viz,  £3,000,000.  Circumstances  might 
possibly  arise  in  which  the  Bank  might  find  it  necessary 
to  restrict  its  issues  within  the  amount  of  £14,000,000. 
In  that  case  the  Bank  will  have  full  power  to  diminish 
the  £3,000,000  of  securities  which  are  to  be  deposited,  in 
addition  to  the  £11,000,000  of  debt  assigned.  I  can 
hardly  conceive  a  case  in  which  it  would  be  advisable  to 
limit  the  issues  to  less  than  £11,000,000.  I  have  said 
that  the  Bank  shall  be  restricted  from  issuing  notes  upon 
securities  to  any  greater  extent  than  £14,000,000."  Fur- 
ther in  the  same  speech  the  manner  in  which  the  opera- 
tion was  to  be  carried  out  was  described:  "Two  Depart- 
ments of  the  Bank  will  be  constituted :  one  for  the  issue  of 
notes,  the  other  for  the  transaction  of  the  ordinary  busi- 
ness of  banking.  The  bullion  now  in  the  possession  of 
the  Bank  will  be  transferred  to  the  Issue  Department. 
The  issue  of  notes  will  be  restricted  to  an  issue  of 
£  1 4,000,000  «  upon  securities — the  remainder  being  issued 
upon  bullion — and  governed  in  amount  by  the  fluctuations 
in  the  stock  of  bullion." 

The  duty  of  the  officials  of  the  Bank  under  these  cir- 
cumstances  is   strictly   limited   to   exchanging  notes  for 


a  Increased,  at  date  of  writing  (June,  1910),  to  £18,450,000  by  authority 
given  in  section  Y  of  the  act  of  1844. 


166 


The      English      Banking      System 

bullion  and  bullion  for  notes.  The  Bank  is  bound  by  law 
to  purchase  gold  bullion  from  whomsoever  offers  it  at 
£3  17s.  9d.  per  ounce  of  standard  quality.  The  issue 
department  may  be  held  not  to  be  virtually  a  department 
of  the  bank.  "  It  is  a  self-acting  institution  of  the  State, 
working  on  the  bank's  premises,  and  absolutely  beyond 
the  control  of  the  bank  directors." 

In  the  words  of  Mr.  Neaves,  a  former  Governor  of  the 
Bank:  "The  issue  department  is  out  of  our  hands  alto- 
gether; we  are  mere  trustees  under  the  act  of  Parliament 
to  see  that  these  securities  are  placed  there  and  kept  up 
to  that  amount,  and  in  no  case  can  any  creditor  of  the 
Bank  touch  that  which  is  reserved  for  a  note  holder." 

The  advisability  of  restriction  had  thus  firm  hold  of  Sir 
Robert  Peel's  mind. 

The  principle  that  the  amount  of  the  notes  in  circulation 
were  not  to  exceed  the  coin  which  it  displaced  was  also 
distinctly  asserted  in  Sir  Robert  Peel's  speech  on  the  Note 
Circulation  in  Scotland  and  Ireland  of  April  25,  1845. 
After  describing  the  method  according  to  which  the  aver- 
age note  issue  was  to  be  computed,  he  added:  "The 
average  amount  of  the  issues  of  each  bank,  and  in  this  I 
include  the  Bank  of  Ireland,  is  to  be  that  to  which  they  are 
entitled  by  the  average  from  their  past  circulation.  They 
are  to  continue  within  that  amount  of  circulation,  and  if 
there  be  ap  excess,  then  that  excess  shall  be  issued  on 
specie."  *  *  *  "There  will  thus  be  a  weekly  return 
of  the  gold  held  by  the  bank ;  and,  in  case  of  excess  of  issue, 
a  certificate  that  that  excess  of  issue  is  met.  The  return 
will  be  made  to  the  Government  weekly,  and  the  publica- 


167 


National    Monetary     Commission 

tion  by  the  Stamp  Oiffice  will  be  monthly.  The  question 
may  be  put,  in  the  event  of  an  issue  beyond  the  permitted 
amount,  upon  what  that  issue  shall  be  made  ?  Shall  it  be 
made  exclusively  upon  gold  coin;  or  shall  silver  be  per- 
mitted to  form  part  of  the  foundation  of  this  issue?  I 
think  it  will  be  of  great  advantage  to  permit  silver  coin  to 
constitute  part  of  that  foundation." 

Sir  Robert  Peel  thus  established  an  arrangement  similar 
to  that  which  regulated  the  issue  of  Bank  of  England  notes 
with  regard  to  the  note  issues  then  existing  of  the  local 
banks  in  Ireland  and  Scotland.  The  average  amount  of 
circulation  at  the  time  when  the  act  was  passed  was 
regarded  as  the  authorized  limit.  Specie  was  to  be  held 
for  any  excess  over  the  limit.  The  coin  thus  set  apart  does 
not  in  any  way  form  a  security  for  the  note  circulation. 
It  is  only  held  and  set  apart  in  compliance  with  the  theory 
of  the  currency  principle  that  a  circulating  medium  formed 
of  paper  and  specie  should  fluctuate  exactly  as  a  circula- 
tion of  specie  would  have  fluctuated. 

Later  on  in  the  same  speech  Sir  Robert  Peel  continued : 
"I  impose  no  limitation  in  the  amount  of  the  issues.  I 
permit  to  Ireland  and  to  Scotland  an  unrestricted  amount 
of  issue,  provided  only  it  take  place  on  the  deposit  of 
that  which  it  professes  to  represent  and  excludes  from 
the  circulation — the  coin  of  the  realm.  But  I  leave  to 
the  banks  of  Ireland  and  Scotland  that  privilege  which 
they  have  so  long  enjoyed,  and  to  which  I  find  they 
attach  so  much  importance — the  privilege  of  continuing 
the  issue  of  £i  and  £2  notes." 


168 


The      English      Banking      Sy  stem 

Corresponding  directions  are  given  in  the  acts  regu- 
lating the  issue  of  bank  notes  in  Ireland  and  Scotland, 
both  of  the  date  of  the  21st  July,  1845,  as  to  the  manner 
in  which  the  circulation  of  notes  issued  at  that  time  was 
to  be  estimated,  and  as  to  the  mode  of  ascertaining  the 
average  amount  of  bank  notes  of  each  banker  in  circula- 
tion and  gold  coin  during  the  four  weeks  to  which  each 
return  extended,  and  further  what  should  be  taken  in  the 
account  of  coin  held  by  any  banker,  the  silver  coin  included 
not  being  allowed  to  exceed  the  proportion  of  one-quarter 
of  gold  (sects,  xvi,  xix,  and  xx  of  the  act  relating  to 
Ireland  (8°  and  9°  Victoriae,  cap.  37)  and  sections  vi,  x, 
and  xi  of  the  act  referring  to  Scotland  (8°  and  9°  Victoriae, 
cap.  38)).  The  difference  between  the  two  acts  consists 
in  the  fact  that  with  regard  to  the  Irish  banks,  the  specie 
was  to  be  held  at  "the  several  head  offices  or  principal 
places  of  issue  in  Ireland  of  such  banker,  such  head  offices 
or  principal  places  of  issue  not  exceeding  four  in  number." 
In  the  case  of  Scotland  "the  monthly  average  amount  of 
gold  and  silver  coin  held  by  such  banker  at  the  head  office 
or  principal  place  of  issue." 

As  practically  the  only  unused  supply  of  gold  coin  in 
the  United  Kingdom  is  that  held  by  the  Bank  of  England 
the  effect  of  these  provisions  of  the  bank  acts  is  to  transfer 
every  fluctuation  in  the  note  circulation  of  Scotland, 
where  the  issue  is  always  above  the  authorized  limit, 
and  many  of  those  in  Ireland,  where  the  issue  as  a  rule 
is  closer  to  the  authorized  limit,  directly  to  the  reserve 
of  the  Bank  of  England.  Hence  as  a  rule  the  specie 
held  against  the  note  circulation,  both  in  Scotland  and 
in  Ireland,  corresponds  very  closely  in  its  movements 
with  the  note  circulation,  fluctuating  as  the  note  circu- 
lation fluctuates. 


169 


National    Monetary     Commission 

The  specie  held  by  the  Scotch  and  Irish  banks  has 
reference  far  more  to  the  note  circulation  than  to  their 
customer's  requirements  for  cash.  The  influence  of  these 
demands  extends  beyond  the  requirements  of  the  Scotch 
and  Irish  banks.  It  will  be  found  on  examination  that  as  a 
rule  the  months  in  which  the  note  circulation  in  Scotland 
and  Ireland,  the  specie  held,  and  the  bank  rate  are 
highest,  in  the  majority  of  instances  correspond. 

I  will  continue  my  history  of  the  circumstances  which 
led  to  this  division  of  the  two  departments. 

The  evidence  of  Mr.  James  Morris,  one  of  the  Directors 
of  the  Bank,  given  to  the  Committee  of  the  House  of 
lyords  on  Commercial  Distress  in  1848  was  to  the  effect 
that  the  Bank  had  ever  since  1840  carried  on  its  business 
in  relation  to  the  circulation  upon  the  system  established 
by  the  Act  of  1844. 

This  idea  had  indeed  been  started  earlier  than  1840. 
Thus  Mr.  J.  Horsley  Palmer,  a  Director  and  at  one  time 
Governor  of  the  Bank  of  England,  stated  before  the  Com- 
mittee of  the  House  of  Commons  on  the  Bank  Charter 
in  1832  that  in  ordinary  times  the  principle  of  the  Bank 
in  managing  its  business  was  to  keep  about  two-thirds  of 
their  available  resources  obtained  from  deposits  and  notes 
in  circulation  in  securities  bearing  interest  and  the  remain- 
der in  coin  and  bullion. 

Mr.  Horsley  Palmer  had  made  a  similar  statement  before 
the  Committee  of  the  House  of  Commons  in  1 840.  (See  his 
evidence  on  pages  224-225.)  This  is  also  mentioned  in 
Tooke's  History  of  Prices.  (Vol.  Ill,  pp.  92-95.)  The  rule 
which,  according  to  the  evidence  of  the  Bank  Directors, 
was  imderstood  to  be  laid  down  "  was,  that  their  securities 
should  be  kept  at  a  nearly  uniform  amount,  and  their  bul- 
lion at  about  one  third  of  their  liabilities."     This  rule, 


170 


The      English       Banking      Sy  stem 

however,  according  to  Tooke,  appears  not  to  have  been 
derived  from  any  particular  principle,  but  from  the  fact 
that  during  the  four  years  from  1 828-1 832  the  securities 
had  been  kept  tolerably  uniform  in  amount.  The  diffi- 
culties in  the  way  of  keeping  the  proportion  uniform  appear 
to  have  been  practically  insuperable. 

One  very  serious  difficulty  in  the  management  of  the 
business  as  required  by  the  Act  of  1 844  does  not  lie  in  the 
proportion  of  the  bullion  held  by  the  Bank  to  the  securities, 
but  in  the  fact  that  the  requirements  of  the  Act  of  1844 
compel  the  supply  of  notes  in  a  period  of  pressure  to  be 
strictly  limited  in  accordance  with  the  law.  It  is  the 
fear  that  a  further  supply  cannot  be  obtained  which 
has  caused  the  greatest  difficulties  in  a  time  of  panic. 
There  have  been  four  serious  crises  since  the  act  of  1844 
came  into  operation,  those  of  1847,  1857,  1866,  and  1890, 
the  Baring  crisis.  During  this  last  there  was  no  pressure 
on  the  bank,  owing  to  the  support  given  to  the  house 
of  Baring  by  the  principal  banking  houses  of  the  country 
and  to  the  precautions  taken  by  the  Bank  of  England 
to  provide  a  large  addition  to  the  bullion  they  held,  but 
in  the  three  earlier  crises  the  pressure  on  the  Bank  of 
England  for  notes  was  very  severe.  It  must  be  remem- 
bered in  connection  with  this  that  it  is  expressly  stated 
by  Section  VI  of  the  Bank  Act  of  1845,  relating  to  Ireland, 
that  while  Bank  of  England  notes  are  not  legal  tender 
in  Ireland,  and  by  Section  XV  of  the  corresponding  Act 
of  1845,  relating  to  Scotland,  that  they  are  not  legal 
tender  in  Scotland,  Bank  of  England  notes  have  been  legal 
tender  in  England  and  Wales  since  the  Act  of  1833.  As 
notes  are  more  convenient  for  transmission  than  specie, 
there  has  been  at  times  of  pressure  a  great  demand  for 


171 


National    Monetary     Commission 

them  by  banks,  since  they  are,  as  legal  tender,  equal 
to  gold,  and  can  be  sent  by  post  to  branch  offices  in 
remote  districts  of  the  country  with  far  greater  ease 
than  gold  can  be.  This  was  the  case  in  1847.  The 
crisis  in  that  year  became  acute  on  October  i,  when  the 
Bank  of  England  refused  to  make  advances  on  public 
securities.  It  was  not,  however,  till  the  25th  of  October 
that  an  official  letter  was  sent  to  the  bank  allowing 
it  to  exceed  the  limit  of  the  act.  The  effect  of  the 
Government  letter  in  allaying  the  panic  was  complete. 
When  the  anxiety  as  to  obtaining  bank  notes  or  gold 
was  removed  the  immediate  pressure  shortly  disappeared. 
In  the  next  crisis,  that  of  1857,  the  treasury  letter,  dated 
November  12,  1857,  permitted  £2,000,000  to  be  added  to 
the  securities  in  the  issue  department.  As  a  matter  of  fact 
the  limits  of  the  Act  were  only  exceeded  on  that  occasion 
in  the  returns  of  i8th  and  25th  of  November.  In  1866 
permission  to  relax  the  Act  was  given,  but  the  reserve 
of  notes  was  never  below  £415,000.  This  figure  ap- 
peared in  the  bank  return  of  June  i .  I  have  been  in- 
formed, and  I  have  every  reason  to  believe  it  was  the 
case,  that  the  Bank  of  England  requested  all  the  bankers 
in  Lombard  street  to  pay  in  every  evening  all  the  notes 
they  had  drawn  during  the  day,  and  that  this  arrange- 
ment saved  the  bank  from  exceeding  the  limits  of  the 
act.  On  these  occasions  the  gold  bullion  in  the  bank 
was  never  less  than  £6,000,000  in  1847  and  1857,  or 
£11,400,000  in  1866.  To  make  this  matter  clear  I  sub- 
join a  table  showing  the  amount  of  the  reserve  of  the 
bank  during  the  most  acute  points  of  the  crises  of  1847, 
1857,  and  1866.  It  will  be  seen  by  this  table  that  the 
bank  reserve  was  reduced  to  a  very  low  point  in  1847, 


172 


The      English      Banking      Sy  stem 

1857,  and  1866,  while  the  bulHon  in  the  issue  department 
was  still  of  considerable  amount.  The  figures  are  as 
follows  on  the  dates  in  question : 


Nov.  1, 1847. 
Nov.  1 1,  1857 
June  I, 1866- 


Bank  reserve. 


£,t,  547.  000 
957.  000 
415, 000 


Bullion. 


£6,  745,000 

6,  666,  000 

1 1,  434,  000 


Table  A. 

Amount  of  gold  bullion  held,  also  of  the  reserve  of  notes  and  the  rate  of  discount 
charged  during  the  crises  of  1847,  iS^y,  and  1866. 


Year  and  month. 


vSept.  I.  1847.. 

Oct.  I,  1847 

Nov.  I,  1847  — 

Dec.  I,  1847 

Jan.  I,  1848 

Sept.  I.  1857 -- 
Oct.  1,  1857.-- 
Nov.  I,  i8s7-- 
Nov.  II,  1857 -. 
Nov.  18  1857  a. 
Nov.  25,  1857  o 

Dec.  I.  1857 

Jan.  I.  1858... 

Mar.  I,  1866--- 

Apr.  I,  1866 

May  I,  1866 

June  I,  1866- - 
July  I,  i866_-- 
Aug.  I,  1866.  - 


Gold  bullion 

Reserve  of 

Rate  of 

in  bank. 

notes. 

discount. 

Per  cent. 

£t,  545.000 

£4,  488,  000 

5J4 

7, 185, 000 

4,  112,  000 

6 

6,  745,  000 

1,547,000 

8 

8, 3is, 000 

4,  228,  000 

7 

10,  262,  000 

7,  786,  000 

6 

10,  564,  000 

5, 83o, 000 

514 

10, 681, 000 

6,014,  000 

6 

8.  777,  000 

3, 485, 000 

8 

6, 666, 000 

6957,000 

10 

6, 079, 000 

•^  I,  148,  000 

10 

6,  784,  000 

I, 918, 000 

10 

6, 895, 000 

a,  268,  000 

10 

10, 905, 000 

6,  064,  000 

8 

i3, I i3, 000 

V , 34s, 000 

7 

i3, 502, 000 

6,  881,  000 

6 

i3, 005, 000 

5,  884,  oco 

7 

11,434,000 

415,  000 

10 

14,  170,  000 

4,  346,  000 

10 

1 2,  893,  000 

2,  63o,  000 

dlO 

1  £2,000,000  was,  under  authority  of  treasury  letter,  November  12,  1857,  added  to 
the  securities  in  the  issue  department  in  the  returns  from  November  18  to  December 
23.  1857,  both  inclusive.  The  strict  limits  of  the  act  of  1844  were  only  exceeded  in  the 
returns  of  November  18  and  25,  1857. 

6  Rate  raised  to  9  per  cent  November  5. 

«  Rate  raised  to  10  per  cent  November  9 ;  remained  at  10  per  cent  till  December  24, 
when  it  was  lowered  to  8  per  cent. 

<i  Reduced  to  8  per  cent  August  6. 


173 


National    Monetary     Commission 

It  is  of  course  impossible  to  conjecture  now  what  altera- 
tions Sir  Robert  Peel  might  have  proposed  in  the  Act  had 
his  life  been  prolonged  beyond  1850,  but  in  the  following 
passage  of  his  speech,  December  3,  1847,  he  admitted  his 
disappointment  in  the  failure  of  one  of  the  three  purposes 
of  the  Act  of  1844,  and  threw  the  blame  of  its  failure  on 
the  Bank  Directors: 

"There  seems  to  have  been  some  misapprehension  as  to 
the  object  contemplated  by  that  Act;  that  which  we  con- 
templated was  that  its  future  effect  would  be  to  prevent  the 
recurrence  of  those  convulsions  which  had  heretofore  fre- 
quently taken  place.  It  had  previously  been  thought,  and 
might  afterwards  have  been  expected,  that  the  Bank  of 
England  would  have  taken  precautions  against  the  ill-regu- 
lated issue  of  its  treasure,  and,  therefore,  the  bill  contained 
no  imperative  regulation  affecting  the  banking  department. 
We  did  hope  that  after  the  panic  of  1826,  after  that  of  1836, 
after  that  also  of  1839,  we  did  hope  that  the  Bank  of  Eng- 
land would  have  confined  itself  to  those  principles  of  bank- 
ing which  their  own  directors  admitted  to  be  just,  but 
from  which  they  had  admitted  their  own  departure,  though 
prescribed  in  part  by  their  own  regulations.  In  that  hope 
I  am  bound  to  acknowledge  that  we  have  been  disap- 
pointed. Seeing  commercial  difficulty  coming,  seeing  the 
approach  of  a  panic,  they  still  did  not  conform  to  those 
regulations;  commercial  houses  were  swept  away  which 
had  long  been  insolvent;  other  houses,  which  under  differ- 
ent circumstances  might  have  proved  perfectly  solvent, 
suffered  from  the  failures  of  those  whose  inability  to  meet 
the  demands  against  them  was  previously  well  known. 


174 


The      English      Banking      Sy  stem 

The  Bill  has  not  sufficed  to  prevent  these  results,  and  so  far, 
also,  I  admit  that  we  have  been  disappointed;  for  the  bill 
was  intended  to  impose,  if  not  a  legal,  at  least  a  moral 
restraint  on  the  Bank,  and  we  hoped  that  it  would  prevent 
the  necessity  of  having  recourse  to  measures  of  extreme 
stringency.  In  that  hope,  likewise,  I  admit  that  we  have 
been  disappointed;  for  this  I  must  contend,  that  it  was  in 
the  power  of  the  Bank,  had  it  taken  early  precautions,  if 
not  to  prevent  all  the  evils  that  have  arisen,  at  least  greatly 
to  diminish  their  force.  If  the  Bank  had  possessed  the 
resolution  to  meet  the  difficulty  of  a  contraction  of  its 
issues  by  raising  the  rate  of  discount,  by  refusing  much  of 
the  accommodation  which  they  granted  between  the  years 
1844  and  1846 — if  they  had  only  been  firm  and  persevering 
in  those  precautions,  the  necessity  for  any  extensive  inter- 
ference with  their  operations  might  have  been  prevented; 
it  might  not  then  have  been  necessary  for  the  Government 
to  authorize  that  violation  of  the  provision,  the  sole  end 
and  object  of  which  was  to  constrain  the  Bank  of  England 
and  prevent  a  recurrence  of  the  panics  of  1836  and  1839. 
Here  I  think  I  may  be  permitted  to  refer  to  what  I  said 
on  the  second  reading  of  the  Bill  of  1844;  at  the  close 
of  the  speech  which  I  then  made  I  thus  expressed  my 
opinions : — 

"The  ministers  were  not  wild  enough  to  suppose  that 
this  measure  would  prevent  all  undue  speculation,  or 
insure  an  invariable  paper  currency;  but  there  was  a 
species  of  speculation  dependent  on  an  undue  issue  of 
paper  which  they  hoped  the  measure  would  check.  Specu- 
lation could  not  be  prevented  in  a  commercial  community, 

76651 — 10 12  175 


National    Monetary     Commission 

but  it  might  be  aggravated  by  a  species  of  paper  credit 
within  the  control  of  ParHament;  and  though  ministers 
did  not  aim  at  checking  legitimate  speculation — though 
they  admitted  they  could  not  prevent  illegitimate  specu- 
tion — which  was,  perhaps,  necessarily  incident  to  mercan- 
tile enterprise,  particularly  in  a  country  like  this,  still 
they  asked  Parliament,  by  assenting  to  this  measure,  not 
to  aggravate  evils  which  it  could  not  control,  nor  refuse  to 
check  those  which  came  properly  within  its  jurisdiction." 

Having  now  sketched  out  the  history  of  the  reasons 
which  led  to  the  division  of  the  two  departments  of  the 
Bank  of  England  and  of  what  occurred  in  the  crises  of 
1847,  1857,  and  1866,  I  will  continue  the  statement  by 
some  remarks  on  the  general  effect  of  that  measure,  and  of 
proposals  which  have  been  made  to  mitigate  the  severity 
of  its  action. 

The  legislation  of  1844,  it  will  be  seen,  put  into  force, 
by  way  of  legal  enactment,  an  arrangement  which  had 
been  made  some  years  previously  by  the  directors  for 
their  own  personal  guidance.  Such  an  arrangement  may 
be  a  very  useful  guide  to  a  Board,  a  valuable  reminder 
to  them  in  their  deliberations  of  the  course  which  they 
ought  to  take.  But  when  the  strictness  of  this  rigid  rule 
is  fixed  and  rendered  absolute  by  legislation,  the  whole 
advantage  of  the  skill  and  intelligence  of  those  who  have 
the  management  is  rendered  powerless  by  the  existence 
of  a  rule,  the  working  of  which  they  are  only  allowed 
to  witness  and  not  in  any  degree  to  control.  Yet  cir- 
cumstances occasionally  arise  which  may  render  the 
keeping  the  rule  impossible.     Mr.  Jones  Loyd  foresaw  this 


176 


The      English      Banking      System 

clearly.  In  his  pamphlet  entitled  "Thoughts  on  the 
Separation  of  the  Departments  of  the  Bank  of  England," 
published  originally  in  1840,  he  remarks:  VIII.  "One 
difficulty  has  been  suggested  as  liable  to  attend  the 
plan  of  a  strict  regulation  of  the  paper  circulation  in 
accordance  with  the  bullion,  which  deserves  attention. 
In  this  country  an  immense  mass  of  liabilities  exist  which 
are  subject  to  be  paid  on  demand,  and  if,  in  consequence 
of  panic  or  any  other  cause  influencing  a  great  number 
of  persons  simultaneously,  the  payment  of  a  large  portion 
of  these  liabilities  should  be  demanded  at  the  same  time, 
either  the  circulation  must  be  largely  increased  or  the 
parties  liable  to  such  demands  must  be  seriously  embar- 
rassed." After  some  other  remarks,  including  the  pos- 
sibility of  a  demand  on  the  Government  on  account  of 
the  savings  banks,  which  demand  would  be  greatly 
increased  at  the  present  time,  he  says:  "The  Government 
has  subjected  itself  to  a  simultaneous  demand,  to  the 
extent  of  the  deposits  in  these  banks,  fifteen  or  sixteen 
millions.  What  would  be  the  effect  of  such  a  demand 
should  it  occur?" 

At  the  time  of  writing  (1910)  this  demand  on  behalf  of 
the  savings  banks,  it  will  be  remembered,  would  be  more 
than  twelve  times  the  amount  named  above,  while  no 
provision  has  been  made  to  meet  it.  Mr.  Jones  Loyd  con- 
tinued: VIII.  5.  "  If,  after  all,  the  danger  is  deemed  to  be 
of  such  a  nature  as  to  require  an  efficient  provision  against 
it — this  is  to  be  found,  not  in  the  general  abandonment 
of  the  attempt  to  place  the  management  of  the  circula- 
tion under  some  fixed  principle;  but  in  that  power,  which 


177 


National    Monetary     Commission 

all  Governments  must  necessarily  possess,  of  exercising 
special  interference  in  cases  of  unforeseen  emergency  and 
great  state  necessity."  The  deliberate  establishment 
of  a  law,  while  foreseeing  at  the  same  time  that  it  was 
certain  to  be  broken,  seems  a  strange  thing.  Yet  this  was 
done  when  the  Act  of  1844  was  passed.  It  is  now  matter 
of  history  that  three  times  since  Sir  Robert  Peel  estab- 
lished the  division  of  the  two  departments,  in  1847, 
1857,  and  1866,  permission  has  had  to  be  given  to  sus- - 
pend  the  law,  and  although  the  law  has  only  been  actually 
infringed  on  one  occasion,  the  principle  was  the  same  on 
all  three. 

So  strongly  was  the  inconvenience  felt  of  the  existence 
of  a  law  which  it  periodically  becomes  necessary  to  sus- 
pend that  in  1873,  when  Mr.  R.  Lowe  (afterwards  Lord 
Sherbrooke)  was  Chancellor  of  the  Exchequer,  a  bill  was 
brought  by  him  into  Parliament  to  "provide  for  author- 
izing in  certain  contingencies  a  temporary  increase  of 
the  amount  of  Bank  of  England  Notes  issued  in  exchange 
for  securities."  The  provisions  of  this  bill,  however, 
were  so  cumbrous  and  exacting — requiring  that,  among 
other  things,  the  rate  of  minimum  interest  on  advances 
made  under  it  should  be  "not  less  than  12  per  cent," 
and  that  the  excess  of  issue  was  not  to  be  allowed  unless 
"the  foreign  exchanges  are  favorable  to  this  country" — 
that  it  was  felt  to  be  unworkable  and  was  allowed  to  drop. 
To  make  this  matter  perfectly  clear  I  will  add  the  text 
of  the  bill. 

The  text  of  the  bill  proposed  by  Lord  Sherbrooke  (then 
Mr.  Robert  Lowe)  in  1873,  to  allow  the  Bank  of  England 


178 


The      English      Banking      Sy  stem 

to  exceed  in  certain  contingencies  the  limits  fixed  for  the 
issue  by  the  Act  of  1 844  is  printed  here  in  full : 
"(j6  Vict.)     Bank  of  England  Notes. 

"A  BILL  To  provide  for  authorising  in  certain  contingencies  a  temporary 
increase  of  the  amount  of  Bank  of  England  Notes  issued         a.  d.  1873. 
in  exchange  for  securities. 

"  Be  it  enacted  by  the  Queen's  most  Excellent  Majesty,  by 
and  with  the  advice  and  consent  of  the  Lords  Spiritual 
and  Temporal,  and  Commons,  in  this  present  Parlia- 
ment assembled,  and  by  the  authority  of  the  same,  as 
follows : 
"  I .  Whenever  the  First  Lord  of  Her  Majesty's  Treasury 

and  the  Chancellor  of  the  Exchequer  after       Power  to  au- 
thorise tempo- 
communication  with  the  Governor  and  Dep-     rary  and  special 

issue  of  Bank  of 

uty  Governor  of  the  Bank  of  England  are     England  notes. 

satisfied — 

(i)  That  the  minimum  rate  of  interest  then  being 
charged  by  the  Governor  and  Company  of  the 
Bank  of  England  on  discounts  and  temporary 
advances  is  not  less  than  twelve  per  cent,  per 
annum;  and 

(2)  That  the  foreign  exchanges  are  favourable  to  this 

country;  and 

(3)  That  a  large  portion  of  the  existing  amount  of 

Bank   of  England   and   other   bank  notes   in 
circulation  is  rendered  ineffective  for  its  ordi- 
nary purpose  by  reason  of  internal  panic: 
they  may,  by  order  under  their  hands,  empower  the  issue 
department  of  the  Bank  of  England  to  make,  in  excess  of 
the  authorised  issue,  a  special  and  temporary  issue  of  Bank 


179 


National    Monetary     Commission 

of  England  notes,  by  delivering  the  same  into  the  banking 
department  in  exchange  for  and  on  the  credit  of  an  equal 
amount  of  Government  securities  to  be  transferred  to  the 
issue  department,  and  the  said  Governor  and  Company 
shall  pay  interest  into  the  Exchequer  on  the  amount  of 
notes  so  issued  by  them  at  such  rate  being  not  less  than 
twelve  per  cent,  per  anntun,  as  may  from  time  to  time  be 
fixed  by  the  First  Lord  of  the  Treasury  and  Chancellor  of 
the  Exchequer,  and  in  addition  thereto  the  amount  of  any 
further  profit  which  they  may  derive  from  the  said  issue. 

"2.  The  First  Lord  of  the  Treasury  and  the  Chancellor 
of  the  Exchequer  may,  if  they  think  it  expe-       order  may  be 

rescinded  or  va- 

dient,  by  order  under  their  hands,  rescind  and    ned. 

vary  any  order  made  in  pursuance  of  this  Act,  and  make 

any  new  order  in  pursuance  of  this  Act, 

"3.  There  shall  be  paid  to  the  said  Governor  a7id  Company 
such  sum,  not  exceeding  the  rate  of  two  per  cent.  Remuneration 
on  the  amount  of  such  issue,  as  may  he  agreed     '°  *""*/"''  "- 

'  y  J  pense  of  special 

Upon  between  the  said  First  Lord  of  the  Treasury  "^"^• 
and  Chancellor  of  the  Exchequer  on  the  one  part,  and  the 
said  Governor  and  Deputy  Governor  of  the  Bank  of  England 
on  the  other  part,  to  be  a  fair  allowance  to  the  Bank  for  the 
risk,  expense,  and  trouble  incurred  by  it  in  making  such 
issue. 

"4.  A  copy  of  every  order  made  under  this  Act  shall  be 
forthwith  published  in  such  manner  as  the       Publication 

•^  and    return    of 

First  Lord  of  the  Treasury  and  the  Chancellor  ZtnV°  '''''^''" 
of  the  Exchequer  consider  best  calculated  for  giving  public 
and  general  notice  thereof,  and  shall  be  laid  before  both 
Houses  of  Parliament  within  fourteen  days  after  it  is  made, 


180 


The      English      Banking      Sy  stem 

or  if  Parliament  be  not  then  sitting,  within  fourteen  days 
after  the  then  next  meeting  of  Parliament. 

"5.  This  Act  may  be  cited  as  the  Bank  of  England  Notes 
Act,  1873,  and  shall  be  construed  as  one  with       construction 

of  Act  and  short 

the  Act  of  the  session  of  the  seventh  and     t'^ie. 
eighth  years  of  the  reign  of  Her  present  Majesty,  chapter 
thirty-two,  intituled  "An  Act  to  regulate  the  issue  of  bank 
notes,  and  for  giving  to  the  Governor  and  Company  of  the 
Bank  of  England  certain  privileges  for  a  limited  period." 

[The  paragraphs  in  italics  are  thus  in  the  original  print 
of  the  bill.] 


181 


Chapter  II. 

THE   SEPARATION  OF  THE  TWO   DEPARTMENTS  AND  THE 
RATE  OF  DISCOUNT. 

To  continue  the  history  of  what  has  occurred.  Strong 
apprehension  was  expressed  before  the  separation  of  the 
two  departments  was  made  that  the  division  would  lead 
to  more  frequent  disturbance  of  the  rate  of  discount 
charged  by  the  Bank.  These  are  referred  to  by  Tooke, 
Volume  V,  of  the  History  of  Prices,  page  555: 

"The  arguments  h  priori  which,  previously  to  the 
passing  of  the  Act  of  1844,  I  adduced  for  the  purpose  of 
showing  the  greater  liability  to  frequent  and  violent 
transitions  in  the  state  of  credit,  and  in  the  rate  of  interest, 
which  would  attend  the  management  of  the  Bank  of  Eng- 
land in  a  Divided,  than  in  an  Undivided,  state  of  the  two 
departments,  have  been  abundantly  confirmed  and  exem- 
plified by  the  actual  working  of  the  measure  since  its 
enactment  to  the  present  time." 

Tooke  referred  to  this  subject  in  his  History  of  Prices, 
in  the  chapter  on  the  anticipations  respecting  the  Act  of 
1844,  Volume  IV,  page  281,  in  which  he  says:  "A  careful 
consideration  of  the  various  plans  which  have  been  sub- 
mitted to  the  public  for  carrying  out  the  currency  principle, 
has  led  to  a  confirmation  of  the  opinion  which  I  have  before 
expressed,  that  under  a  complete  separation  of  the  func- 
tions of  issue  and  banking,  the  transitions  would  be  more 


182 


The      English       Banking      Sy  stem 

abrupt  and  violent  than  under  the  existing  system;  unless, 
and  upon  this,  in  my  opinion,  the  question  hinges,  the 
deposit  or  banking  department  were  bound  to  hold  a  much 
larger- reserve  than  seems  to  be  contemplated  by  any  of  the 
plans  which  I  have  seen." 

Though  the  reserve  has  been  considerably  increased 
since  the  time  when  Tooke  wrote,  yet  this  increase  does 
not  appear  to  have  reached  the  point  which  he  thought 
necessary,  in  proportion  to  the  demands  made  on  it. 

The  tables  at  the  end  of  this  chapter  show  the  minimum 
rates  of  discount  charged,  and  the  number  of  the  changes 
in  the  rate  at  the  banks  of  England,  France,  Germany,  the 
Netherlands,  from  the  year  1844  to  1909,  and  Belgium 
from  the  year  1851.  It  is,  of  course,  impossible  to  com- 
pare exactly  the  position  of  business  in  one  country  and 
another,  and  the  demands  on  the  Bank  of  England  are 
very  different  in  character  from  those  which  fall  on  the 
banks  either  of  France  or  of  Germany.  At  the  same  time, 
it  is  an  interesting  thing  to  examine  this  statement,  which 
shows  how  numerous  and  how  severe  the  variations  in  the 
rate  in  England  have  been. 

It  is  also  useful  to  compare  the  practice  of  one  great  bank 
with  that  of  another.  The  circumstances  of  business  in 
this  country  are,  as  mentioned  before,  so  different  from 
those  of  other  countries,  that  it  is  diflftcult  to  compare 
them  closely  with  each  other;  but  no  one  can  doubt  the 
great  advantages  which  industry  and  commerce  derive 
from  having,  as  far  as  is  possible,  a  fairly  even  rate  of  dis- 
count for  sound  mercantile  paper,  nor  how  greatly  those 
periods  of  unhealthy  excitement,  which  have  occasionally 


183 


National    Monetary     C  ommiss  to 


n 


developed  into  commercial  crises,  have  been  fostered  by 
long  periods  of  very  low  rates  of  interest  in  the  money 
market. 

It  is  also,  of  course,  impossible  to  argue  what  might 
have  occurred  had  the  separation  of  the  two  departments 
of  the  Bank  of  England  not  taken  place,  but,  as  a  matter 
of  history,  there  can  be  ho  question  that  the  fluctuations 
in  the  rate  of  interest  which  have  occurred  since  have  been 
exceedingly  numerous  and  severe,  more  so,  in  fact,  than  in 
the  case  of  any  other  great  bank  of  Europe.  No  doubt 
the  demands  for  gold  on  the  London  money  market  are 
more  sudden  and  greater  than  on  any  other  money  market 
in  Europe,  but  the  question  arises  whether  they  have  not 
been  accentuated  and  rendered  more  severe  than  they 
otherwise  would  have  been  through  the  division  of  the 
Issue  and  Banking  Departments  at  the  Bank  of  England. 

The  statements  which  follow  show — 

1.  The  number  of  changes  in  the  minimum  rate  of  dis- 
count charged  by  the  Banks  of  England,  France,  Germany, 
and  the  Netherlands  for  the  years  1 844-1 909,  and  of  Bel- 
gimn  for  the  years  1 851 -1909, 

2.  The  highest  and  lowest  rate  charged  and  the  amoimt 
of  fluctuation  in  the  rate  in  the  course  of  the  twelvemonth 
at  the  same  banks  for  the  same  period. 

3.  The  number  of  days  for  which  each  rate  was  charged 
by  the  same  banks,  and  for  the  same  periods  arranged  from 
the  lowest  rate  to  the  highest. 

4.  The  number  of  days  for  which  each  rate  was  charged 
by  the  same  banks  and  the  same  periods  arranged  from 
the  largest  number  of  days  to  the  smallest. 


184 


The      English      Banking      System 

A  study  of  these  tables  will  enable  us  to  compare  in  a 
general  way  what  has  occurred  at  each  of  the  five  banks  in 
respect  of  the  rate  charged  on  the  bills  offered  them  for 
discount. 

Table  I  shows  that  the  number  of  changes  in  the  rate 
of  discount  at  the  Bank  of  England  has  been  nearly  four 
times  as  large  as  at  the  Bank  of  France,  and  more  than 
twice  as  large  as  at  the  Bank  of  Germany,  the  Bank  of  the 
Netherlands,  and  the  Bank  of  Belgium.     The  figures  are: 

Number  of  changes,  1844  to  i()og. 

Bank  of  England 443 

Bank  of  France 115 

Bank  of  Germany 196 

Bank  of  the  Netherlands 188 

Bank  of  Belgium  o 192 

It  should  also  be  noted  that  at  the  Bank  of  England 
there  have  occurred  during  the  whole  period  only  2 
years  when  no  change  in  the  rate  of  discount  took  place, 
while  at  the  Bank  of  France  there  have  been  27,  at  the 
Bank  of  Germany  10,  at  the  Bank  of  the  Netherlands  15, 
and  at  the  Bank  of  Belgium  11, 

Table  II  shows  that  the  fluctuations  between  the  high- 
est and  lowest  rate  charged  for  the  twelvemonth  has  been 
more  severe  at  the  Bank  of  England  than  at  either  the 
Bank  of  France,  the  Bank  of  Germany,  the  Bank  of  the 
Netherlands,  or  the  Bank  of  Belgium. 

The  severest  fluctuation  that  has  occurred  at  the  Bank 
of  England  was  in  the  year  1866.  The  lowest  rate  in  that 
year  was  3^2  per  cent,  the  highest  rate  10  per  cent;  the 

a  From  1851  to  1909. 


185 


National    Monetary     Commission 

fluctuation  accordingly  Avas  6%  per  cent.  In  five 
other  years  the  fluctuation  varie(i  from  5  per  cent  to  6 
per  cent. 

The  fluctuations  in  order  of  severity  from  6}4  per  cent 
to  5  per  cent  at  the  Bank  of  England  were  as  follows: 


Year. 


Lowest 
rate. 

Highest 
rate. 

Per  cent. 

Per  cent. 

3J4 

10 

3 

9 

2J4 

8 

3 

8 

3 

8 

3 

8 

Fluctua- 
tion. 


1866 
1873 
1858 
1847 
i86i 
i863 


Per  cent. 
6% 
6 

s 

5 
S 


On  looking  through  the  table  stating  these  fluctuations 
many  other  occasions  will  be  seen  on  which  the  fluc- 
tuations at  the  Bank  of  England,  though  not  so  severe, 
were  very  sharp,  as,  for  instance,  in  the  year  1857, 
when  though  the  total  fluctuation  was  only  4^^  per 
cent  it  was  between  a  rate  of  5^  per  cent  and  10 
per  cent.  Fluctuations  of  this  description  are  very  trying 
to  business. 

At  the  Bank  of  France,  on  the  other  hand,  no  fluctua- 
tion more  severe  than  3>^  per  cent  is  recorded,  and  this 
only  on  two  occasions.     These  were: 


Year. 

Lowest 
rate. 

Highest 
rate. 

Fluctua- 
tion. 

i863      .. 

Per  cent. 

a'A 

Per  cent. 
7 

8 

Per  cent. 
3K 

1864 

3K 

186 


The      English       Banking      Sy  stem 

At  the  Bank  of  Germany  no  fluctuation  more  severe 
than  5  per  cent  has  occurred,  and  only  one  of  that  extent: 


Year. 

Lowest 
rate. 

Highest 
rate. 

Fluctua- 
tion. 

1 866 

Per  cent. 
4 

Per  cent.        Per  cent. 

At  the  Bank  of  the  Netherlands  no  fluctuation  more 
severe  than  4  per  cent  has  occurred  and  only  one  of  that 
extent : 


Year. 

Lowest 
rate. 

Highest 
rate. 

Fluctua- 
tion. 

1858-             -          -      . 

Per  cent. 
3 

Per  cent. 
7 

Per  cent. 
4 

At  the  Bank  of  Belgium  no  fluctuation  more  severe  than 
2,%  per  cent  has  occurred.  This  has  been  the  case  on  two 
occasions. 


Lowest 
rate. 


Highest 
rate. 


Fluctua- 
tion. 


1870- 
1873. 


Per  cent. 
3J4 


Per  cent. 
6 
7 


Per  cent. 
3J4 
3J^ 


Table  III  shows  that  higher  rates,  those  from  8  per  cent 
and  upward,  were  more  frequently  charged  at  the  Bank 
of  England  than  by  the  other  banks,  none  of  those  Banks 
having  charged  10  per  cent  at  all,  at  the  Bank  of  France 
and  the  Bank  of  Germany  9  per  cent  and  8  per  cent 
having  been  charged  only  for  very  short  periods,  and  at 


187 


National    Monetary     Commission 

the  banks  of  the  Netherlands  and  of  Belgium  the  rate 
never  having  exceeded  7  per  cent. 

Table  IV  shows  that  while  the  number  of  days  at  low 
rates  at  the  Bank  of  England  is  large,  it  is  not  so  large 
as  at  the  Bank  of  France.  The  average  rate  at  the  Bank 
of  England  is  lower  than  at  the  Bank  of  Germany,  but  the 
high  rates  at  the  Bank  of  England  have  been  continued 
for  a  much  longer  time,  as  an  examination  of  the  tables 

will  show. 

The  proportion  of  the  specie  held  to  the  liabilities  on 
deposits  and  notes  in  circulation  as  shown  on  the  balance 
sheets  of  the  five  banks  given  on  pages  150-152  in  this 
memorandum  differs  very  greatly.  This  is  shown  in 
the  following  table: 

Proporlion  of  specie  to  liabilities  on  deposits  and  notes  in  circulation. 

Per  cent. 

Bank  of  England 38.4 

Bank  of  France 75-3 

Bank  of  Germany 37-  i 

Bank  of  the  Netherlands 58 

Bank  of  Belgium i7-4 

No  doubt  the  Bank  of  England  is  more  exposed  to 
foreign  demands  on  its  banking  reserve  than  any  other 
bank  in  Europe.  That  the  business  of  the  Barlk  of 
England  is  managed  with  much  care  and  skill  is  well 
known,  but  it  appears  from  the  figures  given  in  the 
tables  which  follow  that  the  division  into  the  two  de- 
partments exposes  the  bank  to  difficulties  which  the 
other  banks  do  not  experience,  and  that  the  number  of 
changes  in  the  rate  of  discount  is  greater  and  the  range 
of  the  fluctuations  also  distinctly  wider  than  at  any  of 
the  other  banks. 


188 


The      English       Banking      System 

Table  I. — Rate  of  discount — Number  of  changes  in  each  year  at  the  banks 
of  England,  France,  Germany,  Holland  {1844-1909),  and  Belgium  {1851- 
1909). 


1844- 
184s- 
1846- 
1847- 
1848- 
1849- 
1850- 
1851- 
1852. 
1853. 

18S4- 
I8S5- 
1856. 
i8s7- 
1858. 
I8S9- 
1860- 
1861. 
1862. 
i863. 
1864. 
i86s- 
1866. 
1867- 
1868- 
1869- 
1870- 
1871- 
1872. 
1873. 
1874- 
187s- 
1876. 
1877. 
1878. 
1879- 
1880. 


l883. 


Bank  of  England. 


Rise.      Fall.      Total 


Perct. 


Per  ct. 


Per 


No  change. 


4 
S 
3 

6 
3 
3 
8 

3  I 

4  I 


Bank  of  France. 


Rise.      Fall.      Total 


I  

1  I 

2  

I  I 

4  4 

4 

I  I 

I   


Perct.   Perct.    Per  ct. 

No  change. 

No  change. 

No  change. 
I  [    I  I     2 

No  change. 

No  change. 

No  change. 

No  change. 

1 
1 
2 
9 
2 


No  change. 
No  change. 


No  change. 


Bank  of  Germany. 


Rise.      Fall.      Total 


Perct. 


Per  ct. 


No  change. 
No  change. 
No  change. 


I  

I 
I  

3  I 

4  2 
I  4 
I  I 


No  change. 
No  change. 
No  change. 


I  

3  I 

3  2 

I  7 


No  change. 
No  change. 


189 


National    Monetary     Commission 

Table  I. — Rate  of  discount — Number  of  changes  in  each  year  at  the  banks 
of  England,  France,  Germany,  Holland  (1844-igog),  and  Belgium  {1851- 
1909) — Continued. 


1884- 
1885. 


1889. 
1890- 
1891- 
1892. 
1S93. 
1894- 
189s- 
1896. 
1897- 
1898. 
1899- 
1900. 

I90i_ 
1902. 
1903 - 
1904. 
190S- 
1906. 
1907. 
1908. 
1909- 


Bank  of  England. 


Rise.      Fall.      Total 


Per  ct. 
4 


Pcrcl. 
3 

S 
3 
4 
5 
4 
7 
7 
3 
6 


Per  ct. 
7 
7 
7 
6 
9 
8 
11 
12 

12 


No  change. 


Bank  of  France. 


Rise.      Fall.      Total 


Perct.    Percl.    Pcrcl. 
No  change. 
No  change. 
No  change. 
No  change. 


413 


No  change. 
No  change. 


No  change. 
No  change. 


No  change. 
No  change. 


No  change. 
No  change. 
No  change. 
No  change. 
No  change. 
No  change. 


No  change. 


6S 


115 


Bank  of  Germany. 


Rise.      Fall.      Total. 


Perct.]  Perct.    Perct. 
No  change. 

S 
5 
2 
2 
4 
3 
4 
2 
S 
2 
1 
8 
5 
6 
7 
3 
4 
8 
2 
1 
7 
5 
4 
6 
3 

196 


I  go 


The      English      Banking      System 

Table  I. — Rate  of  discount — Number  of  changes  in  each  year  at  the  hanks 
of  England,  France,  Germany,  Holland  (1844-1909),  and  Belgium  {1851- 
igo()) — Continued. 


1844. 
184s- 
1846. 
1847- 


1849- 
1850- 
1851. 
1852. 
i8s3. 
i8s4- 
i8ss- 
1856. 
i8s7- 
1858. 
i8s9- 
1860. 
i86x- 
1862. 
1 863. 
1864. 
i86s- 
1866. 
1867- 
1868. 
1869. 
1870. 
1871. 
1872. 
1873. 
1874- 
187s- 
1876. 
1877- 
1878- 
1879- 
1880. 


Bank  of  Holland. 


Rise.  Fall.  Total. 


Percent.   Per  cent.]  Per  cent. 
No  change. 
S 


No  change. 
No  change. 


No  change. 


3 
6   I 

No  change. 

No  change. 


No  change. 
No  change. 


No  change. 


2 
4 
6 
9 
11 
11 
6 
2 

5 
12 
2 
6 
9 
3 
1 


Bank  of  Belgium. 


Rise.  Fall.         Total. 


Per  cent.  \  Per  cent 


No  change. 


2  3 

5  6 

6  3 
9  8 

3  6 

3  6 
2 

1  I 

2  I 
I  3 
I  I 

4  3 


11 
9 

17 
9 
9 
■2 
2 

4 

7 


1  Operations  commenced  in  1851. 


76651- 


191 


National    Monetary     Commission 

Table  i. — Rate  of  discount — Number  of  changes  in  each  year  at  the  banks 
of  England,  France,  Germany,  Holland  {1844-igoQ),  and  Belgium  {1851- 
1909) — Continued. 


1S86. 
1887. 
i888_ 
1889. 
1890. 
1891. 
1892. 
1893- 
1894. 
189s- 
1896- 
1897- 


1900. 
1901  - 
1902- 
1903. 
1904- 
190S- 
1906- 
1907. 

i9o8_ 
1909- 


Year. 


Bank  of  Holland. 


Rise.  Fall.         Total 


Per  cent. 
S 


Per  ceni. 
3 


Per  cent. 
8 
4 
1 
1 


No  change. 
No  change. 
No  change. 
No  change. 


No  change. 


No  change. 


4 
3 
1 
6 
2 

2 
1 
1 
4 
3 
1 

1 
1 
2 
3 
3 
3 
2 

188 


Bank  of  Belgium. 


Rise.  Fall.         Total 


Per  ceni. 
4 


Per  cent. 
6 


Per  cent. 
10 
1 
2 
6 
4 
2 
« 
4 
2 


No  change. 


No  change. 


No  change. 


No  change. 

2   I 

No  change. 


192 


192 


The      English       Banking      System 

Table  II. — Lowest  and  highest  rates  charged  and  extent  of  fluctuation  dtiring 
each  year,  Banks  of  England,  France,  Germany,  Holland  {1844-igog),  and 
Belgium  (1851-igog). 


1844. 
184s- 
1846, 
1847- 


1849- 
1850. 
1851. 
i8s2_ 
1853, 
i8s4- 
i8S5- 
1856, 
i8s7- 
1858. 
18S9- 
1860- 
1861. 
1862. 
i863. 
1864. 
i86s- 
1866. 
1867- 
i868_ 
1869. 
1870. 
1871. 
1872. 
1873- 
1874- 
187s- 
1876- 
1877- 
1878. 
1879- 
1880. 


Bank  of  England. 


Low- 
est 
rate. 


High- 
est 
rate. 


Fluc- 
tua- 
tion. 


Per  ct.  I  Per  ci. 
No  change 

33/2 


3 
3 
3 

2j^ 
2}4 


3V2 

8 
5 
3 
3 


Per  ct. 
1 


No  change. 


S 
SY2 


2Y2 

3 

2 

3 

6 

3 

iY2 


2  y2 
2Y2 


3 

Y2 

sy2 

4J 

2 

3J4 

5 

1 

5 

3 

4 

6; 

1  ! 

1 

2 

3^- 

3 

4 

6 

SY2 

4 

3 

3 

4 

3 

Yi 
2Y2 


Bank  of  France. 


Low- 
est 
rate. 


High- 
est 
rate. 


Fluc- 
tua- 
tion. 


Per  ct.     Per  ct.     Per 
No  change. 
No  change. 
No  change. 
4      I  si 

No  change. 
No  change. 
No  change. 
No  change. 


Bank  of  Germany. 


3 

4 

3 

4 

4 

S 

4 

6 

5 

6 

S 

9 

3 

5 

3 

4 

3Y2 

4^ 

4J4 

7 

3y2 

S 

SY, 

7 

4Y2 

8 

3 

S 

3 

S 

2ji 

3 

No  change. 

No  change. 

2Y2  6 


N 

0  change 

3 

4 

2 

3 

2 

3 

2 

3 

2Y2 

3Y2 

3Y2 

5 

1 
1 
1 

2 
1 

4 
2 
1 
1 

lY, 

\Y2 

ZY2 
SY2 
2 
2 


35^ 

1 

1 

2 

1 

1 
1 
1 
1 
1 
IY2 


Low- 
est 
rate. 

High- 
est 
rate. 

Per  ct. 

Per  ct. 

4 

4Y2 

4 

5 

4 

S 

4Y2 

S 

4Y2 

s 

4 

4Y2 

Fluc- 
tua- 
tion. 


Per  ct. 


No  change. 
No  change. 
No  change. 

S 

s 

4Y2 

6 

5 

No  change. 
No  chanfee. 
No  change. 

4  J4 
Y2  7 

7 

9 
No  change. 
No  change. 


4 

5 

4 

8 

4 

S 

4 

S 

4 

6 

4 

6 

4 

6 

3K 

6 

4 

sH 

4 

s 

3 

4J^ 

4 

5Y2 

4 

5Y2 

1 
1 

2 

2J4 
2K 
1 


2K 

3 

5 


1 
4 
1 
1 

2 
2 
2 

2  5-i 
IJ^ 
1 
l^i 

iY2 


193 


National    Monetary     Commission 


Table  II. — Lowest  and  highest  rates  charged  and  extent  of  fluctuation  during 
each  year,  Banks  of  England,  France,  Germany,  Holland  (i844-igo()),  and 
Belgium    1851-1909) — Continued. 


i883- 
1884. 
188s- 
1886- 
1887- 


1890- 
1891. 
1892. 
1893. 
1894- 
189s- 
T896. 
1897- 
1898. 
1899. 
1900. 
1901- 

I902_ 

i9o3_ 
1904. 
190S- 
i9o6_ 
1907- 
1908. 
1909- 


Bank  of  England. 


Low- 
est 
rate. 


Per 


2K 


High- 
est 
rate. 


Perct. 
6 
S 

S 
5 
S 
5 
5 
6 
6 
S 

i'A 
S 
3 
No  change 


Fluc- 
tua- 
tion. 


2 

4 

2 

4 

2% 

4 

3 

6 

3 

6 

3 

5 

3 

4 

3 

4 

3 

3J4 

2 'A 

4 

3K 

6 

4 

7 

2K 

6 

2}4 

S 

Bank  of  France. 


Low- 
est 
rate. 


Per  ct. 
3 
2 
3 
S 
3 
3 
S 

3K 
3 

iVi 
I'A 
i'A 
1 

2 
2 

8 
3 
2 
1 
1 

'A 
I'A 
iA 
3 

S'A 
lA 


Per  ct. 

3 


High- 
est 
rate. 


Bank  of  Germany. 


Fluc- 
tua- 
tion. 


Per  ct. 
5 
3A 

No  change. 

No  change. 

No  change. 

No  change. 
2^1  4J4| 

3      1  4      1 

No  change. 

No  change. 
2A\         3     \ 

No  change. 

No  change. 
2     I         2  A\ 

No  change. 

No  change. 

2  3 

3  4A 
3  a'A 

No  change. 

No  change. 

No  change. 

No  change. 

No  change. 

No  change. 
3A\         4     I 
3     I  3a\ 

No  change. 


Per 


1 

lA 
lA 


Low- 
est 
rate. 


Per  ct. 


High- 
est 
rate. 


Per  ct. 
6 


Fluc- 
tua- 
tion. 


Per  ct. 
2 


No  change. 


4 

s    1 

3 

5      1 

3 

S 

3 

4A\ 

3 

s 

4 

s5^: 

3 

s^! 

3 

4 

3 

s 

3 

? 

3 

4 

3 

S 

3 

s 

3 

6 

4 

7 

S 

7 

3M 

4^ 

3 

4 

3J4 

4 

4 

5 

3 

6 

4J^ 

7 

5^ 

754 

4 

6K 

3A 

S 

1 

2 

2 

2 

2J^ 

1 

2 

2 

1 

2 

2 

3 

3 

2 

1 

1 

A 
1 
3 

2K 
2 
2J4 

1^2 


194 


The       English       Banking      System 

Table  II. — Lowest  and  highest  rates  charged  and  extent  of  fluctuation  during 
each  year,  Banks  of  England,  France,  Germany,  Holland  {1844-igog),  and 
Belgium  {18  51-igog) — Continued. 


Year. 


1844 
184s 
1846 
1847 
1848 
1849 
1850 
1851 
1852 
1853 
1854 
i8ss 
1856 
I8S7 
1858 
i8S9 
i860 
1861 
1862 
1 863 
1864 
186s 
1866 
1867 
1868 
1869 
1870 
1871 
1872 
1873 
1874 
187s 
1876 
1877 
1878 
1879 
1880 


Bank  of  Holland. 


Bank  of  Belgium. 


Lowest 
rate. 


Per  cent. 


2K 

4 

4 

3 

2J4 


3 

i'A 

3 

4^4 

3 

4J4 

2% 

2% 

2% 

3 

3 

2  ]/2 

4 

3}^ 

3 


Highest 
rate. 


Fluctua- 
tion. 


Per  cent. 


Per  cent. 
No  change. 

SH 

S 

S 

3 

2J1, 
No  change. 
No  change. 

3 
No  change. 

4 

7 

7 
No  change. 
No  change. 

4 

4 

5 

7 

6 

7 

4K 

3J^ 

S 

6 

4 

S 

6K 

S 

3Ji 
No  change. 
No  change. 

4 

4 
No  change. 

o  Operations  commenced  185 1 


Per  cent. 

3 

1 
2 


1 

3 
4 


1 

2 

2J^ 

3 

2^ 

2 

1 

2M 

8 

1 

2yj 
1% 


Lowest 
rate. 


Highest 
rate. 


Per  cent. 


Fluctua- 
tion. 


Per  cent. 


No  change. 

No  change. 
No  change. 
No  change. 


3 

4 

1 

3M 

5K 

2 

3 

5 

2 

3 

4 

1 

3 

4 

1 

3 

5 

2 

3 

4 

1 

3 

sJ^ 

2^2 

4 

6 

2 

3 

6 

3 

3 

6 

3 

2j^ 

3 
No  change. 
No  change. 

A 

2V2 

6 

3J4 

2y. 

5M 

3 

2j^ 

sK 

3 

3J4 

7 

8J4 

3J4 

6 

2K 

3 

4  34 

I'A 

2J4 

3J4 

1 

2^4 

334 

1 

2>S 

4K 

2 

2M 

4 

1^ 

3 

3J4 

K 

193 


National    Monetary     Commission 

Table  II. — Lowest  and  highest  rates  charged  and  extent  of  fluctuation  during 
each  year,  Banks  of  England,  France,  Germany,  Holland  {1844-1909),  and 
Belgium  (i<?5i-j909)— Continued. 


1 883 
1884 
i88s 
1886 
1887 
1888 
1889 
1890 
1891 
1892 
1893 
1894 
189s 
1896 
1897 
1898 
1899 

1900 
I90I 
1902 
i9o3 
1904 
190S 
1906 
1907 
1908 
1909 


Bank  of  Holland. 


Lowest 
rate. 


Per  cent. 

3K 
3K 
3 
2K 


2j^ 

3 

2j^ 
2H 
2J4 

3 

2K 

•2}4 

3J4 
3 

3 

3 

2% 

3 

5 

3 

2j^ 


Highest 
rate. 


Per  cent. 
a'A 

5% 

3H 
3 

No  change. 

No  change. 

No  change. 

No  change. 

4/4 
3 
5 
3K 

No  change. 
.  3M 
3J4 
3 
S 
S 
3J4 

No  change. 
3K 
3K 
3 
S 
6 
S 
3 


Fluctua- 
tion. 


Per  cent. 
1 
2 
2 


2 

!>-» 

2H 
1 

1 

2J4 
\% 

2 
1 
2 


Bank  of  Belgium. 


Lowest 
rate. 


Per  cent. 

3M 

3J4 

3 

3 

2K 

2J4 
2^3 

3 
3 


Highest 
rate. 


Pey  cen/. 


3J^=, 
S 
5 
4 

No  change. 
2J4|  3 

2j^|  3 

No  change. 

2j^[  3 

2J4|  3 

No  change. 
3 

S 
5 
4 

No  change. 
3      j  4 

No  change. 
3 

A'A 

6 

6 


Fluctua- 
tion. 


3H 


3J4 


3J4 


•  ceni. 
2 
2J^ 

1 
1 

1 

2J-, 


'A 

'A 

1 

1 
1 


1 
1 

2 
3 

J4 


196 


The      English      Banking      System 

Tabi^E  III. — Rate  of  discount,  1844-igog — The  number  of  days  at  each  rate 
arranged  from  the  louuest  rate  to  the  highest. 

BANK  OF  ENGLAND. 
[Lowest  rate,  2  per  cent;   highest  rate,  10  per  cent.] 


Rate  per 
cent. 

Number  of 
days. 

Number  of 

days  per 

cent  of  total. 

(Total  = 

1,000.) 

2 

2% 
2H 
3 

3H 
4 

4J4 
5 

SM 
6 

6H 
7 
8 
9 
10 

3,409 

28 

8,599 

5,859 

1,921 

8,772 

608 

2,195 

263 

975 

91 

633 

268 

95 

141 

143 

I 

ISI 

246 

80 

is8 

26 

92 

II 

41 

4 

26 

II 

4 

6 

23,857 

I,  000 

BANK  OF  FRANCE. 
[Lowest  rate,  2  per  cent;  highest  rate,  9  per  cent.] 


Rate  per 
cent. 

Number  of 
days. 

Number  of 

days  per 

cent  of  total. 

(Total  = 

1,000.) 

2 

2j^ 

3 
3J4 

4 

45/a 

S 

S'A 

6 

6H 

7 

8 
9 

2,735 
2,579 

7,828 

2,060 

4.579 

353 

2,061 

120 

1,170 

8 

286 

21 

41 

16 

IIS 

108 

329 

86 

192 

-    I'S" 

86 

S 

49 

12 

I 
2 

23,857 

I,  000 

197 


National    Monetary     Commission 

Table  III. — Rate  of  discount,  1844-1909 — The  number  of  days  at  each  rate 
arranged  from  the  lowest  rate  to  the  highest — Continued. 

IMPERIAL  BANK  OF  GERMANY. 
[Lowest  rate,  3  per  cent;   highest  rate,  9  per  cent.] 


Rate  per 
cent. 

Number  of 
days. 

Number  of 

days  per 

cent  of  total. 

(Total  = 

1,000.) 

3 

3'A 

4 

A'A 

5 

5^ 

6 

7 

7 'A 
8 
9 

3,073 

644 

12,192 

1,626 

4,094 

707 

970 

72 

269 

110 

37 

63 

129 

27 

Sii 

•^ 

172 

3o 

41 

3 

1 1 

5 

I 

2 

23,857 

I,  000 

BANK  OF  THE   NETHERLANDS. 
[Lowest  rate,  2  per  cent;  highest  rate,  7  per  cent.] 


Rate  per 
cent. 

Number  of 
days. 

Number  of 

days  per 

cent  of  total. 

(Total  = 

1,000.) 

2 

2J4 

3 

3;-i 
4 

aH 
5 

S'A 

6 

6% 

7 

1,328 

5,058 

8,013 

3,737 

2,167 

811 

1,823 

375 

260 

150 

135 

S6 

212 

336 

157 

91 

34 

76 

16 

1 1 

6 

S 

23,857     1           1,000 

7  7^ 


198 


The       English       Banking      Sy  stem 


Table  III. — Rate  of  discount,  1844-1909 — The  number  of  days  at  each  rate 
arranged  from  the  lowest  rate  to  the  highest — Continued. 

NATIONAL  BANK  OF  BELGIUM. 
[Lowest  rate,  2  li  per  cent;   highest  rate,  7  per  cent.] 


Rate  per 
cent. 

Number  of 
days. 

Number  of 
days  per 

cent  of  total. 

(Total  = 

1,000.) 

2>i 

3 

3J4 
4 

4'A 
S 

6 

7 

3,169 

9,412 

2,965 

3,416 

698 

944 

878 

540 

27 

147 
437 
i38 
159 

32 

44 
18 

25 

21,549 

1 ,  000 

Table  IV. — Rate  of  discount,  1844-igog — The  number  of  days  at  each  rate 
arranged  from,  the  highest  number  of  days  to  the  lowest. 

BANK  OF  ENGLAND. 


Number  of         Rate  per 
days.                    cent. 

Number  of 

days  per 

cent  of  total. 

(Total= 

1,000.) 

5,859 

3,772 

3.559 

3,409 

2,195 

1,921 

975 

633 

608 

268 

263 

141 

95 

91 

28 

3 

4 

2  1'2 
S 

6 
7 

4^ 
8 

5 'A 
10 
9 
6'A 

2'A 

246 

158 

151 

143 

92 

80 

41 

26 

26 

1 1 

1 1 

6 

4 

4 

I 

23,857 

1,000 

199 


National    Monetary     Commission 


Table  IV. — Rate  oj  discount,  1844-1909 — The  number  ol  days  at  each  rate 
arranged  from  the  highest  number  of  days  to  the  lowest — Continued. 


BANK  OF  FRANCE. 


Number  of 
days. 

Rate  per 
cent. 

Number  of 
days  per 

cent  of  total. 
(Total  = 
1,000.) 

7,828 

4,579 

2,735 

2,579 

2,061 

2,060 

1,170 

353 

286 

120 

41 

21 

16 

8 

3 
4 
2 

5 

3% 

6 

4'a 

7 

8 

7H 
9 
65^ 

329 

192 

IIS 

108 

86 

86 

49 

15 

12 

5 

2 

I 

23,857 

1,000 

IMPERIAL  BANK  OF  GERMANY. 


Number  of 
days. 

Rate  per 
cent. 

Number  of 

days  per 

cent  of  total. 

(Total= 

1,000.) 

12,192 

4,094 

3,073 

1,626 

970 

707 

644 

269 

110 

72 

63 

87 

4 

S 

3 

45-2 

6 

5  3-5 

3'A 

7 

T'A 

6J4 

9 

8 

511 

172 

129 

68 

41 

3o 

27 

II 

S 

3 

3 

I 

23,857 

I,  000 

The       English       Banking       System 


Table  IV.- — Rate  of  discount,  1844-igog — The  number  of  days  at  each  rate 
arranged  from  the  highest  number  of  days  to  the  lowest — Continued. 

BANK  OF  THE  NETHERLANDS. 


Number  of 
days. 

Rate  per 
cent. 

Number  of 

days  per 

cent  of  total. 

(Total= 

1,000. ) 

8,013 

5,058 

3,737 

2,167 

1,828    • 

1,328 

811 

375 

260 

150 

135 

3 

3H 
4 
5 
2 

4^ 

S'A  ■ 
6 

7 

336 

212 

157 

91 

76 

S6 

34 

16 

1 1 

6 

S 

23,857 

I,  000 

BANK  OF  BELGIUM. 


Number  of 
days. 

Rate  per 
cent. 

Number  of 

days  per 

cent  of  total. 

(Total  = 

1,000.) 

9,412 

3,416 

3,169 

2,965 

944 

698 

540 

378 

27 

3 
4 

2J4 

334 
S 

4^i 
6 

7 

437 
IS9 
147 
i38 
44 

32 
2S 

18 

21,549 

I,  000 

Chapter  III. 

CORRESPONDENCE  BETWEEN  THE  GOVERNMENT  AND  THE 
BANK  OF  ENGLAND  DURING  'THE  CRISES  OF  1847,  1857, 
AND  1866. 

On  each  occasion  when  permission  was  given  to  the 
Bank  of  England  to  suspend  the  Act  of  1844  correspond- 
ence took  place  between  the  Government  and  the  Bank 
on  the  subject.  This  is  given  in  full  here  to  explain 
what  took  place. 

There  is  no  complete  official  statement  of  the  corre- 
spondence between  the  Government  and  the  bank  during 
the  crises  of  1847,  1857,  and  1866.  The  letters  which 
follow  are  extracted  from  the  report  of  the  Committee 
of  the  House  of  Lords  on  the  Commercial  Distress  in  1847, 
from  Tooke's  History  of  Prices  and  from  the  Economist 
newspaper.  It  must  be  remembered  that  when  the  sus- 
pension of  the  Bank  Act  has  been  allowed  this  has  never 
been  at  the  commencement  of  a  period  of  stress,  but 
not  till  the  anxiety  has  gone  on  for  some  considerable 
time.  The  correspondence  between  the  Government 
and  the  Bank  which  took  place  on  the  occasion  of  the 
crises  of  1847,  1857,  and  1866,  which  I  subjoin,  shows 
this  very  clearly.  The  periods  were  marked  by  great 
commercial  distress,  by  many  failures  of  banks  and  of 
business  houses  which  might  in  an  ordinary  way  have 
met  all  their  engagements,  and  there  is  no  doubt  that 
the  length  of  time  which  was  occupied  in  the  correspond- 
ence, joined  to  a  feeling  of  doubt  whether  the  suspension 
of  the  bank  act  would  be  permitted,  added  greatly  to  the 


The      English       Banking      Sy  stem 

anxiety.  The  high  rates  charged  for  discounts  and  ad- 
vances also  tended  to  increase  this.  I  write  as  a  man  who 
has  lived  through  the  crisis  of  1866,  with  some  remem- 
brance even  of  earlier  troubles,  and  I  can  bear  witness 
to  the  misery  which  has  taken  place  at  such  periods, — 
the  distress  of  the  working  classes  through  want  of  em- 
ployment,— the  destruction  of  property, — the  loss  of  cap- 
ital,— and  of  the  lives  of  friends  whose  constitutions  were 
sapped  by  the  prolonged  anxiety. 

CORRESPONDENCE  BETWEEN  THE  GOVERNMENT  AND  THE 
BANK  OF  ENGLAND  IN  THE  CRISIS  OF  1 847. 

Downing  Street,  October  25,  1847. 

Gentlemen  :  Her  Majesty's  Government  have  seen  with 
the  deepest  regret,  the  pressure  which  has  existed  for  some 
weeks  upon  the  commercial  interests  of  the  country, 
and  that  this  pressure  has  been  aggravated  by  a  want  of 
that  confidence  which  is  necessary  for  carrying  on  the 
ordinary  dealings  of  trade. 

They  have  been  in  hopes  that  the  check  given  to 
transactions  of  a  speculative  character,  the  transfer  of 
capital  from  other  countries,  the  influx  of  bullion,  and 
the  feeling  which  a  knowledge  of  these  circumstances 
might  have  been  expected  to  produce,  would  have  re- 
moved the  prevailing  distrust. 

They  were  encouraged  in  this  expectation  by  the  speedy 
cessation  of  a  similar  state  of  feeling  in  the  month  of  April 
last. 

These  hopes  have,  however,  been  disappointed,  and 
Her  Majesty's  Government  have  come  to  the  conclusion 
that  the  time  has  arrived  when  they  ought  to  attempt, 
by  some  extraordinary  and  temporary  measure,  to  restore 
confidence  to  the  mercantile  and  manufacturing  com- 
munity. 


203 


National    M o  n  et  ar y     Commission 

For  this  purpose,  they  recommend  to  the  Directors  of 
the  Bank  of  England,  in  the  present  emergency,  to  enlarge 
the  amount  of  their  discounts  and  advances,  upon  ap- 
proved security;  but  that,  in  order  to  retain  this  opera- 
tion within  reasonable  limits,  a  high  rate  of  interest 
should  be  charged.  In  present  circumstances  they  would 
suggest  that  the  rate  of  interest  should  not  be  less  than 
8  per  cent. 

If  this  course  should  lead  to  any  infringement  of  the 
existing  law.  Her  Majesty's  Government  will  be  prepared 
to  propose  to  Parliament  on  its  meeting,  a  Bill  of  Indem- 
nity. 

They  will  rely  upon  the  discretion  of  the  Directors  to 
reduce  as  soon  as  possible  the  amount  of  their  notes, 
if  any  extraordinary  issues  should  take  place,  within  the 
limits  prescribed  by  law. 

Her  Majesty's  Government  are  of  opinion  that  any 
extra  profit  derived  from  this  measure  should  be  carried 
to  the  account  of  the  public,  but  the  precise  mode  of 
doing  so  must  be  left  to  future  arrangement. 

Her  Majesty's  Government  are  not  insensible  to  the 
evil  of  any  departure  from  the  law  which  has  placed  the 
currency  of  this  country  upon  a  sound  basis;  but  they 
feel  confident  that,  in  the  present  circumstances,  the 
measure  which  they  have  proposed  may  be  safely  adopted; 
and  that,  at  the  same  time,  the  main  provisions  of  that 
law  and  the  vital  principle  of  preserving  the  convertibility 
of  the  bank-note  may  be  fairly  maintained. 

We  have  the  honor  to  be.  Gentlemen, 

Your  obedient  humble  servants, 

(Signed)  John  Russell. 

Charles  Wood. 

The  Governor  and  Deputy-Governor  of  the  Bank 
OF  England. 


204 


The      E^t  g  I  is  h       Banking      Sy  stem 

[Reply.] 

Bank  of  England,  October  25,  i84Y- 
Gentlemen:  We  have  the  honor  to  acknowledge  your 
letter  of  this  day's  date,  which  we  have  submitted  to  the 
Court  of  Directors,  and  we  enclose  a  copy  of  the  resolu- 
thereon;  and 

We  have  the  honor  to  be,  Sirs, 
Your  most  obedient  servants, 

(Signed)  James  Morris,  Governor. 

H.  J.  PrESCOTT,  Deputy-Governor. 
To  the  First  Lord  of  the  Treasury  and  the  Chan- 
cellor OF  THE  Exchequer. 

Resolved,  That  this  Court  do  accede  to  the  recommen- 
dation contained  in  the  letter  from  the  First  Lord  of  the 
Treasury  and  the  Chancellor  of  the  Exchequer,  dated  this 
day,  and  addressed  to  the  Governor  and  Deputy -Governor 
of  the  Bank  of  England,  which  has  just  been  read: 

That  the  minimum  rate  of  discount  on  bills  not  having 
more  than  ninety-five  days  to  run  be  8  per  cent: 

That  advances  be  made  on  bills  of  exchange,  on  stock. 
Exchequer  bills,  and  other  approved  securities,  in  sums 
of  not  less  than  £2,000  and  for  periods  to  be  fixed  by  the 
Governors,  at  the  rate  of  8  per  cent  per  annum. 

The  following  is  the  letter  addressed  by  the  First  Lord  of 
the  Treasury  and  the  Chancellor  of  the  Exchequer  at  mid- 
day on  Thursday  (November  12)  to  the  Bank: 

[Taken  from  "The  Economist,"  November  14,  1857.) 

correspondence  between  the  government  and  the 
bank  of  england  in  the  crisis  of  1 857. 

Downing  Street,  November  12. 
Gentlemen:  Her  Majesty's  Government  have  observed 
with  great  concern  the  serious  consequences  which  have 
ensued  from  the  recent  failure  of  certain  joint  stock  banks 


205 


National    Monetary     Commission 

in  England  and  Scotland,  as  well  as  of  certain  large  mer- 
cantile firms,  chiefly  connected  with  the  American  trade. 

The  discredit  and  distrust  which  have  resulted  from 
these  events,  and  the  withdrawal  of  a  large  amount  of  the 
paper  circulation  authorized  by  the  existing  Bank  Acts, 
appear  to  Her  Majesty's  Government  to  render  it  necessary 
for  them  to  inform  the  Bank  of  England  that  if  they  should 
be  unable  in  the  present  emergency  to  meet  the  demands 
for  discounts  and  advances  upon  approved  securities  with- 
out exceeding  the  limits  of  their  circulation  prescribed  by 
the  Act  of  1844,  the  Government  will  be  prepared  to  pro- 
pose to  Parliament,  upon  its  meeting,  a  bill  of  indemnity 
for  any  excess  so  issued. 

In  order  to  prevent  this  temporary  relaxation  of  the 
law  being  extended  beyond  the  actual  necessities  of  the 
occasion.  Her  Majesty's  Government  are  of  opinion  that 
the  Bank  terms  of  discount  should  not  be  reduced  below 
their  present  rate." 

Her  Majesty's  Government  reserve  for  future  considera- 
tion the  appropriation  of  any  profit  which  may  arise  upon 
issues  in  excess  of  the  statutory  amount. 

Her  Majesty's  Government  are  fully  impressed  with  the 
importance  of  maintaining  the  letter  of  the  law,  even  in  a 
time  of  considerable  mercantile  difficulty,  but  they  believe 
that,  for  the  removal  of  apprehensions  which  have  checked 
the  course  of  monetary  transactions,  such  a  measure  as  is 
now  contemplated  has  become  necessary,  and  they  rely 
upon  the  discretion  and  prudence  of  the  Directors  for 
confining  its  operation  within  the  strict  limits  of  the 
exigencies  of  the  case. 
We  have,  etc., 

(Signed.)  Palmerston. 

G.  C.  Lewis. 

The  Governor  and  Deputy-Governor  of  the  Bank 
OF  England. 

oThe  rate  was  10  per  cent;  raised  to  this  point  November  5. 


206 


The      English      Banking-      System 

The  following  is  a  copy  of  a  letter  addressed  by  the 
Directors  of  the  Bank  of  England  to  the  Government  in 
reference  to  their  issues  since  the  12th  ultimo  (November 

12,1857): 

[Taken  from  "The  Economist,"  December  5,  1857.] 

Bank  of  England,  December  2,  1^37. 

My  lyORD  AND  Sir,  We  have  the  honor  to  acknowledge 
the  receipt  of  your  letter  of  the  27th  instant  {sic,  in 
Economist),  requesting  "  such  an  explanation  with  respect 
to  the  course  which  the  Directors  of-  the  Bank  of  England 
have  pursued  in  regulating  their  issues  of  notes  since  the 
1 2th  instant,  as  they  may  be  able  to  furnish  for  the  informa- 
tion of  Her  Majesty's  Government." 

In  complying  with  this  wish,  it  may  be  well  to  allude  to 
the  position  of  the  Bank  of  England  accounts  anterior  to 
the  receipt  of  the  letter  of  the  1 2th. 

On  the  24th  October  the  bullion  in  the  issue  depart- 
ment was  £8,777,000;  the  reserve,  £4,079,000;  the  notes 
in  the  hands  of  the  public,  £19,766,000;  the  discounts  and 
advances,  £10,262,000;  and  the  deposits,  £16,126,000;  the 
rate  of  discount  at  the  bank  being  8  per  cent  for  bills  having 
not  more  than  ninety-five  days  to  run. 

In  the  following  week  a  great  shock  to  credit  and  a  con- 
sequent demand  on  the  Bank  of  England  for  discounts 
arose,  from  the  failure  of  the  Liverpool  Borough  Bank, 
whose  re- discounted  bills  were  largely  held  by  the  bill 
brokers  and  others  in  London.  The  effects  of  this  and 
other  failures,  however,  up  to  this  time,  had  not  occasioned 
any  alarming  pressure  on  the  resources  of  the  Bank,  or 
great  disquietude  in  commercial  affairs  in  London. 

On  the  5th  of  November  the  reserve  was  £2,944,000,  the 
bullion  in  the  issue  department  £7,919,000,  and  the 
deposits  £17,265,000.  The  rate  of  discount  was  advanced 
to  9  per  cent  and  on  the  loth  of  November  to  10  per  cent. 

76651 ID 14  207 


National    Monetary     Commission 

The  continental  drain  for  gold  had  ceased,  the  American 
demand  had  become  unimportant,  and  there  was  at  that 
time  little  apprehension  that  the  Bank  issues  would  be 
inadequate  to  meet  the  necessities  of  commerce  within  the 
legalized  sphere  of  their  circulation. 

Upon  this  state  of  things,  however,  supervened  the 
failure  of  the  Western  Bank  of  Scotland,  and  the  City  of 
Glasgow  Bank,  and  the  renewed  discredit  in  Ireland,  caus- 
ing an  increased  action  upon  the  English  circulation,  by 
the  abstraction  in  four  weeks  of  upward  of  £2,000,000  of 
gold,  to  supply  the  wants  of  Scotland  and  Ireland;  of 
which  amounts  more  than  £  i  ,000,000  was  sent  to  Scot- 
land, and  £280,000  to  Ireland,  between  the  5th  and  12th 
of  November. 

This  drain  was  in  its  nature  sudden  and  irresistible,  and 
acted  necessarily  in  diminution  of  the  reserve,  which  on 
the  nth  had  decreased  to  £1,462,000  and  the  bullion  to 
£6,666,000. 

The  public  became  alarmed,  large  deposits  accumulated 
in  the  Bank  of  England,  money  dealers  having  vast  sums 
lent  to  them  upon  call  were  themselves  obliged  to  resort 
to  the  Bank  of  England  for  increased  suppHes,  and  for 
some  days  nearly  the  whole  of  the  requirements  of  com- 
merce were  thrown  on  the  Bank.  Thus,  on  the  12th,  it 
discounted  and  advanced  to  the  amount  of  £2,373,000, 
which  still  left  a  reserve  at  night  of  £581,000. 

Such  was  the  state  of  the  Bank  of  England  accounts  on 
the  12th,  the  day  of  the  publication  of  the  letter  from  the 
Treasury.  The  demand  for  discounts  and  advances  con- 
tinued to  increase  till  the  21st,  when  they  reached  their 
maximum  of  £21,616,000. 

The  public  have  also  required  a  much  larger  quantity 
of  notes  than  usual  at  this  season,  the  amount  in  their 
hands  having  risen  on  the  21st  to  £21,544,000. 


208 


The      English      Banking      System 

The  Bank  have,  since  the  12th,  under  the  authority  of 
the  letter  from  the  Treasury,  issued  £2,000,000  of  notes 
in  excess  of  the  Hmits  of  the  circulation  prescribed  by  the 
Act  of  1844,  and  have  passed  securities  to  the  issue  depart- 
ment to  that  amount. 

That,  however,  is  not  the  measure  of  the  amount 
actually  parted  with  by  the  Bank,  which  has  not  exceeded 
£928,000,  the  remainder  of  the  £2,000,000  having  been 
retained  as  a  reserve  of  notes  in  the  banking  department, 
which,  at  the  same  time,  also  held  £407,020  in  coin. 

We  subjoin  a  statement  of  accounts  from  the  nth 
November  to  the  28th,  inclusive,  from  which  it  will  be 
apparent  that  the  Bank  continued  to  meet  all  demands  for 
discounts  and  advances  on  approved  securities,  to  remedy 
the  commercial  discredit  and  distress  mentioned  in  your 
letter  of  the  12th  instant,  "as  occasioned  by  the  recent 
failure  of  certain  joint  stock  banks  in  England  and  Scot- 
land, as  well  as  of  certain  large  mercantile  firms  chiefly 
connected  with  the  American  trade,"  and  aggravated  by 
the  subsequent  embarrassment  of  large  joint  stock  banks. 

In  discounts  and  advances,  the  sum  supplied  to  the 
public  between  the  12th  November  and  the  ist  December 
amounted  in  the  aggregate  to  £12,645,000.     We  have,  etc. 
(Signed)  Sheffield  Neave,  Governor. 

BoNAMY  DoBREE,  Deputy  Governor. 

To  the  Right  Hon.  the  First  Lord  of  The  Treasury 
and  the  Right  Hon.  the  ChancEIvLOR  of  the 
Exchequer. 


209 


National    Monetary     Commission 


Dr. 


Statement  of  accounts. 
ISSUE  DEPARTMENT. 


i8s7 
November  1 1 . . 

12.  . 

i3.. 
I4-- 
16-. 
17-. 
18.. 
19-- 


Notes  issued. 


£21,  141,  000 
20,  990,  000 
23, 185, 000 

22, 801, 000 

22,  639,  000 
22,  579,  000 

22.  SSSi  000 
22,  S90,  000 
22,  565,  000 


1857. 

November  21. 

23. 

24- 

25- 

26. 
27- 
28- 
3o- 
December     i  _ 


Notes  issued. 


j£22,  937,  000 

23, 123, 000 
23, 2i3, 000 
23, 259, 000 
23, 3o5, 000 
23,  207, 000 
23,  267,  000 
23, 3io, 000 
23,  337,  000 


Cr. 


1857 

November  11.. 
12.. 
i3.. 
14- 
16-. 
17-. 
18-. 
19- 
20.. 
21  _. 

23-. 

24- 
25- 
26- 
27- 

28_ 

3o. 
December      i . 


Government 
debt. 


£11.  ois, 
II. 015, 
II. 015, 
II. 015, 
II, 015, 
III  015, 
II. OIS, 
II. OIS, 
II. OIS, 
II. OIS, 
II.  OIS, 
II. 015, 
II. OIS, 
II. 015, 
II.  OIS, 
II,  OIS, 
II, CIS, 
II,  015, 


000 
000 
000 
000 
000 
000 
000 
000 
000 
000 
000 
000 
000 
000 
000 
000 
000 
000 


Other  se- 
curities. 


£3,  460, 
3,  460, 


460, 

460, 

460, 

460, 

460, 

460, 

460, 

460, 

5.460, 

5.460, 

5.  460, 

5.  460, 

5.  460, 

5.  460, 

S.  460, 

5.  460, 


000 
000 
000 
000 
000 
000 
000 
000 
000 
000 
000 
000 
000 
000 
000 
000 
000 
000 


Gold  coin 
and  bullion. 


£6,666, 
6.524. 
6,  710, 
6,326, 
6,  164, 
6,  104, 
6,080, 
6, IIS. 
6,  090, 
6, 462, 
6,648, 
6,738, 
6,784, 
6,83o, 
6,  732, 
6,  792, 
6,835, 
6,862, 


000 
000 
000 
000 
000 
000 
000 
000 
000 
000 
000 
000 
000 
000 
000 
000 
000 
000 


Total. 


£21, 
20, 

i3, 
22, 
22, 


141,  000 
990, 000 

i8s, 000 
801, 000 
639, 000 
579,  000 
555, 000 
590, 000 
565, 000 
937, 000 
123, 000 
2i3, 000 
259, 000 
3o5, 000 
207,  000 
267,  000 
3io,  000 
337,  000 


The      English      Banking      System 


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The      English      Banking      System 


statement  of  accounts — Continued. 
BANKING  DEPARTMENT— Continued. 


I8S7. 
November  1 1 

12 

i3--. 

14--. 

16--. 

17-.. 

18-.. 

19-- 


Notes  with  the 
public. 


;£2o,  i83,  000 
20, 868, 000 
21,371,  000 
21,  423,  000 
21,  499,  000 
21,  41S,  000 
21,  407,  000 
21,  486, 000 
21, 493, 000 


185/ 
November  21. 

23. 

24- 

25- 

26. 
27- 
28. 
3o. 
December     i . 


Notes  with  the 
public. 


£21,  554,  000 
21 , 520, 000 
21, 529, 000 
21 ,  340,  000 
21 , 548, 000 
21 , 549, 000 
21,  45  1 ,  000 
21,  325,  000 
21,  280,  000 


M.  Marshall,  Chie]  Cashier. 
Bank  of  England,  December  j,  iS^j. 

CORRESPONDENCE  BETWEEN  THE  GOVERNMENT  AND  THE 
BANK  OF  ENGLAND  IN  THE  CRISIS  OP  1 866, 

[Taken  from  "The  Economist,"  May  19,  1866.] 

RELAXATION    OF   THE    BANK    ACT. 

The  following  is  the  correspondence  that  has  taken 
place  between  the  Governor  of  the  Bank  of  England  and 
the  Ministry  on  the  subject  of  the  recent  pressure  in  the 
money  market — 

[Copy.] 

Bank  of  England,  May  ii,  1866. 

Sir, — We  consider  it  to  be  our  duty  to  lay  before  the 
Government  the  facts  relating  to  the  extraordinary  de- 
mands for  assistance  which  have  been  made  upon  the 
Bank  of  England  to-day,  in  consequence  of  the  failure  of 
Messrs.  Overend,  Gurney  &  Co. 

We  have  advanced  to  the  bankers,  bill  brokers,  and 
merchants  in  London  during  the  day  upwards  of  £4,000,000 
sterling  upon  the  security  of  Government  stock  and  bills 
of  exchange — an  unprecedented  sum  to  lend  in  one  day.. 


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National    Monetary     Commission 

and  which,  therefore,  we  suppose  would  be  sufficient  to 
meet  all  their  requirements,  although  the  proportion  of 
this  sum  which  may  have  been  sent  to  the  country  must 
materially  affect  the  question. 

We  commenced  this  morning  with  a  reserve  of  £5,727,- 
000,  which  has  been  drawn  upon  so  largely  that  we  can 
not  calculate  on  having  so  much  as  £3,000,000  this 
evening,  making  a  fair  allowance  for  what  may  be  remain- 
ing at  the  branches. 

We  have  not  refused  any  legitimate  application  for 
assistance,  and  unless  the  money  taken  from  the  Bank  is 
entirely  withdrawn  from  circulation  there  is  no  reason  to 
suppose  that  this  reserve  is  insufficient. 

We  have  the  honor  to  be,  Sir,  your  obedient  servants, 
(Signed)  H,  L.  Holland,  Governor. 

(Signed)  Thos.  Newman  Hunt, 

Deputy -Governor. 
The  Right  Hon.  the  Chancellor 

OP  THE  Exchequer,  M.  P.,  etc.,  etc. 

To  the  Governor  and  Deputy-Governor  of  the  Bank  of  Eyiglajid. 

Gentlemen, — We  have  the  honor  to  acknowledge  the 
receipt  of  your  letter  of  this  day  to  the  Chancellor  of  the 
Exchequer,  in  which  you  state  the  course  of  action  at  the 
Bank  of  England,  under  the  circumstances  of  sudden 
anxiety,  which  have  arisen  since  the  stoppage  of  Messrs. 
Overend,  Gurney  &  Co.  (Limited)  yesterday. 

We  learn  with  regret  that  the  Bank  reserve,  which  stood 
so  recently  as  last  night  at  a  sum  of  about  five  millions 
and  three  quarters,  has  been  reduced  in  a  single  day  by 
the  liberal  answer  of  the  Bank  to  the  demands  of  com- 
merce during  the  hours  of  business  and  by  its  great 
anxiety  to  avert  disaster,  to  little  more  than  half  of  that 
amount,  or  a  sum  (actual  for  London  and  estimated  for 
the  branches)  not  greatly  exceeding  three  millions. 


214 


The       English       B a^t  k  in  g'      System 

The  accounts  and  representations  which  have  reached 
Her  Majesty's  Government  during  the  day  exhibit  the 
state  of  things  in  the  City  as  one  of  extraordinary  distress 
and  apprehension.  Indeed,  deputations  composed  of  per- 
sons of  the  greatest  weight  and  influence,  and  representing 
ahke  the  private  and  joint  stock  banks  of  London,  have 
presented  themselves  in  Downing  street  and  urged  with 
unanimity  and  with  earnestness  the  necessity  of  some 
intervention  on  the  part  of  the  vState  to  allay  the  anxiety 
which  prevails,  and  which  appears  to  have  amounted, 
through  great  part  of  the  day,  to  absolute  panic. 

There  are  some  important  points  in  which  the  present 
crisis  differs  from  those  of  1847  and  1857.  Those  periods 
were  periods  of  mercantile  distress,  but  the  vital  consid- 
eration of  banking  credit  does  not  appear  to  have  been 
involved  in  them,  as  it  is  in  the  present  crisis. 

Again,  the  course  of  affairs  was  comparatively  slow  and 
measured;  whereas  the  shock  has  in  this  instance  arrived 
with  an  intense  rapidity,  and  the  opportunity  for  deliber- 
ation is  narrowed  in  proportion.  Lastly,  the  reserve  of 
the  Bank  of  England  has  suffered  a  diminution  without 
precedent  relatively  to  the  time  in  which  it  has  been 
brought  about,  and  in  view  especially  of  this  circumstance 
Her  Majesty's  Government  can  not  doubt  that  it  is  their 
duty  to  adopt  without  delay  the  measures  which  seem  to 
them  best  calculated  to  compose  the  pubHc  mind,  and  to 
arrest  the  calamities  which  may  threaten  trade  and  indus- 
try. If,  then,  the  Directors  of  the  Bank  of  England,  pro- 
ceeding upon  the  prudent  rules  of  action  by  which  their 
administration  is  usually  governed,  shall  find  that  in  order 
to  meet  the  wants  of  legitimate  commerce,  it  be  requisite 
to  extend  their  discounts  and  advances  upon  approved 
securities,  so  as  to  require  issues  of  notes  beyond  the  limits 
fixed  by  law,  Her  Majesty's  Government  recommend  that 
this  necessity  should  be  met  immediately  upon  its  occur- 


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National     Monetary     Commission 

rence,  and  in  that  event  they  will  not  fail  to  make  appli- 
cation to  Parliament  for  its  sanction. 

No  such  discount  or  advance,  however,  should  be  granted 
at  a  rate  of  interest  of  less  than  ten  per  cent,  and  Her 
Majesty's  Government  reserve  it  to  themselves  to  recom- 
mend, if  they  should  see  lit,  the  imposition  of  a  higher 
rate.  After  deduction  by  the  Bank  of  whatever  it  may 
consider  to  be  a  fair  charge  for  its  risk,  expense,  and 
trouble,  the  profits  of  these  advances  will  accrue  to  the 
public. 

We  have  the  honor  to  be,  Gentlemen,  your  obedient 
servants, 

(Signed)  RussELiv. 

(Signed)  W.  E.  Gladstone. 

Downing  Street,  May  ii,  1866. 

Bank  of  England,  May  12,  1866. 
To  the  Right  Hon.  Earl  Russell  and  the  Right  Hon.  W.  E. 

Gladstone,  M.  P. 

My  Lord  and  Sir — Having  laid  before  the  Court  of 
Directors  the  letter  received  from  you  yesterday,  with 
respect  to  a  further  issue  of  notes,  if  necessary,  beyond  the 
limit  fixed  by  the  Act  of  1844,  we  have  now  the  honor  to 
enclose  a  copy  of  the  resolutions  of  the  Court  thereupon. — 

We  have  the  honor  to  be,  my  Lord  and  Sir,  your  most 
obedient  servants, 

(Signed)  H.  L.  Holland,  Governor. 

(Signed)  Thos.  N.  Hunt,  Deputy  Governor. 

Copy  of  Resolutions  Enclosed. 

At  a  Court  of  Directors  of  the  Bank  on  Saturday,  the 
1 2th  of  May,  1866: — 

Resolved, — That  the  governors  be  requested  to  inform  the 
First  Lord  of  the  Treasury  and  the  Chancellor  of  Exchequer 
that  the  Court  is  prepared  to  act  in  conformity  with  the 
letter  addressed  to  them  yesterday. 


216 


The       English       Banking      System 

Resolved, — That  the  minmium  rate  of  discount  on  bills 
not  having  more  than  ninety-five  days  to  run  be  raised 
from  9  to  ID  per  cent. 

Hammond  Chubb,  Secretary. 

The  comments  of  the  editor  of  "The  Economist "  at  the 
time  were  as  follows.  They  are  found  in  "The  Econo- 
mist," May  26,  1866,  and  will  assist  the  reader  to  under- 
stand the  circumstances  of  the  crisis. 

THE  PRACTICAL  EFFECT  OF  THE  ACT  OF  1 844. 

"  The  main  use  of  the  law  is  that  it  compels  the  Bank  to 
act  at  an  early  stage  during  a  foreign  drain  of  bullion. 
They  must  with  the  Act  raise  the  rate  of  discount;  they 
ought  not  to  raise  it  without  the  Act.  It  accomplishes 
this  end  in  a  most  effectual  manner.  It  separates  the 
banking  reserve  on  which  a  foreign  drain  always  acts,  and 
therefore  makes  such  a  drain  of  more  instant  importance 
than  it  would  be  otherwise.  The  Bank  is  cut  into  two 
halves,  and  the  half  which  feels  the  foreign  drain  has  to  be 
kept  solvent  without  going  to  the  half  which  does  not  feel 
it.  Accordingly  the  Bank  Directors  must  act  early  and 
promptly;  if  they  did  not,  the  Banking  Department  would 
be  bare,  as  it  was  in  1857  and  1847,  before  they  had 
aroused  themselves  to  act  as  they  ought.  During  the 
cotton  drain  the  Act  of  1844  worked  in  this  manner.  It 
made  the  Bank  directors  act  whether  they  would  or  no, 
and  so  kept  a  large  bullion  reserve  in  the  country. 

"  Of  course  the  Bank  directors  might  have  been  wise 
enough  to  act  as  promptly  and  wisely  without  any  legis- 
lation. But  before  the  Act  of  1 844  they  did  not  do  so. 
We  have,  rightly  or  wrongly,  but  by  incurable  custom  and 


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National     Monetary     Commission 

habit,  committed  the  custody  of  the  Bank  reserve  of  the 
country  to  a  single  estabUshment.  Without  the  Act  of 
1844  we  should  have  to  rely  on  their  discretion  only;  but 
the  Act  of  1844  makes  the  danger  of  neglecting  a  drain  of 
bullion  so  tremendous  and  so  palpable  that  no  Bank 
directors  can  neglect  it. 

"  But  this  advantage  of  the  Act  of  1844  is  purchased  at 
the  cost  of  three  great  evils : — 

"  I .  That  a  panic  is  necessarily  aggravated.  It  is  absurd 
to  talk  of  the  present  state  of  the  money  market  as  having 
been  caused  by  the  Act  of  1844.  If  it  had  been  it  would 
have  been  cured  by  the  Treasury  Letter  and  the  suspension 
of  that  Act.  But  it  has  not  been  so  cured.  The  profound 
distrust  created  by  diffused  bad  business  still  exists.  But 
the  Act  of  1844,  for  a  day,  engendered  artificial  fear.  As 
we  have  shown,  the  auxiliary  credit  currency,  the  currency 
of  banking  credit,  having  been  impaired  and  injured, 
more  notes,  more  primary  credit  currency,  is  wanted  to 
supply  its  place.  On  what  is  called  "Overend's  Friday," 
the  want  of  such  currency  was  palpable,  and  it  was  given. 
The  Act  of  1844  is  responsible  not  for  the  present  want  of 
credit,  but  for  the  difference  between  the  acute  agony 
which  preceded  the  relief  from  the  Treasury  and  the  slow 
suffering  which  we  still  feel.  Certainly,  Peel's  Act  is  a 
legal  ligament  which  inflames  panic  into  frenzy, 

"2.  What  is  of  little  consequence  in  comparison,  but  yet 
is  of  some : — The  Act  of  1 844  makes  the  quarterly  payments 
of  the  dividends  and  the  salaries  very  serious  matters, 
whereas  otherwise  they  would  scarcely  be  felt.  The 
banking  reserve  being  isolated,  any  considerable  amount 


218 


The      English       Banking     System 

of  notes  withdrawn  from  it,  even  for  internal  purposes, 
makes  a  marked  change,  and  unless  the  matter  is  most 
deHcately  managed  by  the  Bank,  and  most  heedful  prepa- 
rations are  made  beforehand,  the  rate  of  interest  is  raised 
unnecessarily.  Whether  a  few  more  notes  or  not  go  out 
to  the  public  is  immaterial  if  we  make  up  the  account  in 
the  "old  form,"  or  as  the  accounts  of  the  Bank  of  France 
are  made  up;  but  the  loss  of  those  notes  at  critical  instants, 
is  made  most  important  by  the  Act  of  1844. 

"3.  There  is  a  danger  from  Sir  Robert  Peel's  Act  we  now 
experience  for  the  first  time;  its  suspension  is  liable  to 
cause  foreign  discredit.  And  this  defect  is  most  serious. 
The  good  of  the  Act  of  1 844  is  that  it  compels  the  directors 
to  raise  the  rate  of  interest,  and  so  attract  money  from 
abroad.  The  high  value  of  money  makes  foreign  nations 
lend  it  to  us.  But  as  no  similar  legislation  to  the  Act  of 
1844  prevails  out  of  England,  foreigners  are  puzzled  by 
the  frenzy  it  excites,  and  the  necessity  of  an  extra  legal 
intervention  to  allay  it.  They  fancy  that  cash  payments 
have  been  suspended, — our  Foreign  Office  has  to  write  a 
letter  to  explain  the  matter.  As  England  in  times  of  dear 
money  is  a  systematic  borrower,  lives  on  international 
credit,  the  existence  of  an  Act  which  must  at  such  times 
often  be  suspended,  and  which,  when  suspended,  creates 
foreign  suspicion,  is  a  serious  new  difficulty.  We  never 
felt  it  before,  because  we  never  acted  so  well  before, — never 
raised  the  rate  of  interest  so  high  before. 

"  Such  are  in  their  barest  form  the  defects  and  the  merits 
of  the  Act  of  1844.  We  have  stated  them  in  the  simplest 
and  shortest  way  of  which  they  are  capable,  in  order  that 


219 


National    Monetary     Commission 

the  practical  men  of  business  for  whom  we  are  writing 
may  recognize  the  truth  of  what  we  say  by  the  plain 
testimony  of  their  own  experience." 

Besides  the  remarks  in  the  "Economist"  newspaper  as 
to  the  danger  of  causing  discredit  of  this  country  abroad, 
mentioned  above,  it  is  well  to  refer  to  the  fact  that  "The 
circular  issued  at  this  time  by  the  Earl  of  Clarendon  then  at 
the  foreign  office,  in  which  it  was  stated  that  '  Her  Majesty's 
Government  have  no  reason  to  apprehend  that  there  is 
any  general  want  of  soundness  in  the  ordinary  trade  of 
this  country  which  can  give  reasonable  ground  for  anxiety 
or  alarm  either  in  this  country  or  abroad,'  only  served  to 
increase  the  distrust  felt  by  foreigners." 

(History  of  the  Bank  of  England  by  A.  Andreades, 
professor  of  political  science  in  the  University  of  Athens, 
P-  361.) 


Chapter  IV. 

EXTRACTS  FROM  EVIDENCE  AND  REPORTS  OF  COMMITTEES 
OF  THE  HOUSE  OF  COMMONS,  1832,  1840,  1848,  AND  HOUSE  OF 
LORDS,  1847-48,  ON  THE  DIVISION  OF  THE  DEPARTMENTS. 

The  extracts  referred  to  above  give  an  outline  of  the 
history  of  the  circumstances  which  led  up  to  the  division 
of  the  issue  department  and  the  banking  department  of 
the  Bank  of  England  and  of  the  reasons  which  caused 
permission  to  be  given  for  the  suspension  of  the  Act  of 
1844  in  the  year  1847.  They  are  taken  from  various 
reports  of  Committees  of  the  House  of  Commons  and 
House  of  Lords  and  from  the  evidence  given  before  those 
Committees.  Among  these  I  have  particularly  consulted 
the  Report  and  Minutes  of  Evidence  taken  before  the 
Secret  Committee  of  the  House  of  Commons  on  the  Bank 
of  England  Charter  (ordered  to  be  printed  August  1 1 , 
1832),  the  Select  Committee  of  the  House  of  Commons  on 
Banks  of  Issue  (ordered  to  be  printed  August  7,  1840),  the 
Secret  Committee  of  the  House  of  Commons  on  Commer- 
cial Distress  (ordered  to  be  printed  June  8,  1848),  Appen- 
dix to  the  last  (ordered  to  be  printed  June  8,  1848,  and 
August  2,  1848),  and  the  Report  from  the  Secret  Com- 
mittee of  the  House  of  Lords  on  Commercial  Distress, 
session  1847-48  (ordered  to  be  reprinted  February  17, 
1857).  The  best  contemporary  information  as  to  the 
history  of  the  country  at  this  period  from  a  commercial 
point  of  view  is  to  be  found  in  these  Reports.  The  Enquiry 
made  by  the  Committee  of  the  House  of  Lords  is  the  most 
complete.     The   quotations   I   have   given   are   scattered 


National    Monetary     Commission 

through  the  Reports  and  Evidence  given  to  the  Commit- 
tees of  both  Houses  of  Parliament.  These  form  several  large 
volumes,  but  I  have  endeavored  to  arrange  the  quotations 
so  as  to  give  as  far  as  I  can  a  connected  statement  of  the 
events  which  led  up  to  the  Crisis  of  1847  and  of  the  influ- 
ence which  the  Division  of  the  two  Departments  of  the 
Bank  of  England  had  on  the  business  of  the  country  at  the 
time.  The  papers  I  have  f)repared  will,  I  hope,  put  before 
the  Members  of  the  National  Monetary  Commission  as 
complete  a  history  of  these  events,  in  a  short  compass,  as 
can  be  given.  I  have  made  a  memorandum  before  each 
separate  quotation  from  the  Evidence,  of  the  name  of 
the  Questioner,  and  of  the  person  who  gave  the  answers, 
so  as  to  enable  any  reader  who  desires  to  continue  the 
investigation  to  refer  to  the  original  documents.  The 
numbers  appended  to  each  question  and  answer  are  those 
which  occur  in  the  original  Parhamentary  Paper.  There 
have  been  no  similar  Enquiries  made  by  either  House  of 
Parliament  after  any  subsequent  Crisis. 

EXTRACT  FROM  EVIDENCE  BEFORE  SECRET  COMMITTEE  ON 
BANK  OF  ENGLAND  CHARTER,  HOUSE  OF  COMMONS, 
1832. 

(Questioner,  Viscount  Althorp;  the  answers  are  from 
Mr.  John  Horsley  Palmer,  then  Governor  of  the  Bank  of 
England.) 

72.  What  is  the  principle  by  which  in  ordinary  times 
the  Bank  is  guided  in  the  regulation  of  their  issues? 

Note. — The  advantage  of  keeping  the  Bank  of  England  free  from  the 
control  of  the  Government  is  clearly  expressed  in  the  evidence  of  Mr.  John 
Horsley  Palmer,  at  that  time  governor  of  the  bank,  in  his  answers  551-557. 
part  of  the  evidence  given  before  the  committee  of  the  House  of  Commons 
in  1832,  on  the  charter  of  the  Bank  of  England. — R.  H.  Inglis  Palgrave. 


The      English       B  an  k  i  n  g      Sy  stem 

The  principle,  with  reference  to  the  period  of  a  full 
currency,  and  consequently  a  par  of  exchange,  by  which 
the  bank  is  guided  in  the  regulation  of  their  issues  (except- 
ing under  special  circumstances)  is  to  invest  and  retain 
in  securities,  bearing  interest,  a  given  proportion  of  the 
deposits,  and  the  value  received  for  the  notes  in  circula- 
tion, the  remainder  being  held  in  coin  and  bullion;  the 
proportions  which  seem  to  be  desirable,  under  existing 
circumstances,  may  be  stated  at  about  two-thirds  in 
securities  and  one-third  in  bullion;  the  circulation  of  the 
country,  so  far  as  the  same  may  depend  upon  the  Bank, 
being  subsequently  regulated  by  the  action  of  the  Foreign 
Exchanges. 

73.  By  the  circulation  of  the  country,  do  you  mean  the 
whole  circulation  of  the  country,  and  not  the  country 
circulation  ? 

The  whole  circulation  of  the  country. 

74.  When  you  say  that  as  a  general  principle  you  think 
it  desirable  to  have  one-third  of  bullion  in  your  coffers, 
against  your  circulation,  you  mean  to  include  in  that 
circulation  not  only  your  paper  out,  but  all  deposits, 
whether  of  Government  or  individuals  ? 

Yes. 

75.  In  short,  all  liabilities  to  pay  on  demand? 
Yes. 

76.  And  you  hold  the  liability  to  pay  on  demand  arising 
from  a  deposit,  to  be  an  equivalent  to  a  note  out  ? 

I  hold  it  to  be  that  sort  of  liability  which  the  Bank  are 
bound  to  provide  for  by  a  reserve  of  bullion. 

77.  Do  you  think  the  liability  arising  from  the  deposit 
to  be  more  dangerous  to  the  Bank  as  to  sudden  calls,  or 
less  dangerous  to  it  than  the  same  amount  out  in  paper  ? 

Less  dangerous. 

(The  questioner,  as  before.  Viscount  Althorp.  Answers 
from  Mr.  John  Horsley  Palmer.) 


76651—10 15  223 


National    Monetary     Commission 

551.  You  stated  in  your  evidence,  that  you  think  a 
single  estabhshment  would  be  better  for  the  management 
of  the  circulation  of  the  country,  than  having  notes  issued 
by  different  establishments;  if  that  be  the  case,  do  you 
consider  that  that  single  establishment  ought  to  be  a  com- 
mercial company,  independent  of  the  Government? 

I  do. 

552.  Will  3^ou  state  the  reason  for  that  opinion? 
Because  it  has  the  power  of  giving  that  commercial  aid 

which  I  have  alluded  to  in  the  explanation  I  have  offered 
to-day. 

553.  Why  would  it  have  the  power  of  giving  commercial 
aid,  being  independent  of  the  Government,  which  it  would 
not  have  if  it  were  not  independent  of  the  Government  ? 

I  imagine  that  a  connnercial  l^ank,  formed  as  the  Bank 
of  England  is,  has  the  power,  from  the  constitution  of  its 
body,  of  offering  assistance  to  the  commercial  world  which 
no  political  bank  could  offer. 

554.  Do  you  think  that  if  the  Bank  was  connected  with 
Government,  the  power  of  granting  commercial  aid,  in  the 
way  you  liave  described,  would  be  liable  to  abuse? 

If  the  Bank  is  formed  of  commercial  individuals,  as  the 
Bank  of  England  now  is,  with  a  capital  totally  uncon- 
nected with  the  Government,  it  appears  to  me  to  answer 
every  purpose  that  is  desired. 

555.  If  it  was  a  Government  bank,  would  it  have  the 
same  facility  of  giving  aid  in  cases  of  commercial  difficulty, 
that  a  commercial  body,  like  the  Bank  of  England  has  ? 

I  do  not  think  that  a  bank  formed  of  political  individ- 
uals, or  of  commissioners,  would  have  the  same  general 
knowledge  of  the  comxmercicil  transactions  of  the  country, 
as  a  body  formed  of  commercial  persons. 

556.  You  think,  then,  that  a  knowledge  of  individuals 
that  apply  for  aid,  which  a  commercial  body  possesses,  is 


224 


The      English       Banking      Sy  stem 

essential  in  order  to  enable  them  to  give  commercial  aid 
properly  in  times  of  difficulty  ? 

I  think  so. 

557.  Do  you  think  it  is  also  important  that  that  aid 
should  be  afforded  by  a  body  independent  of  any  political 
connections  or  considerations  ? 

I  do. 

EXTRACT  FROM  REPORT  OF  THE  COMMITTEE  OF  THE  SELECT 
COMMITTEE  OF  THE  HOUSE  OF  COMMONS  ON  BANKS  OF 
ISSUE,  1840. 

I  need  not  quote  in  detail  the  evidence  given  before  this 
Committee,  as  the  Report  sums  up  the  whole  question  as  to 
this  division  of  the  two  departments  with  the  following 
words : 

In  the  course  of  their  inquiry  into  the  management  of 
the  affairs  of  the  Bank  of  England  the  attention  of  your 
committee  has  necessarily  been  directed  to  the  principle 
by  which  it  was  stated  in  the  evidence  taken  before  the 
6ank  Charter  Committee  in  1832  that  the  Bank  was  in 
ordinary  circumstances  guided  in  the  regulation  of  its 
issues.  The  principle  has  been  restated  to  Your  Committee, 
in  Mr.  Horsley  Palmer's  evidence,  in  the  following  ques- 
tions and  answers: 

EXTRACT  FROM    EVIDENCE,  COMMITTEE  OF  HOUSE   OF   COM- 
MONS  ON    BANKS   OF   ISSUE,   1840. 

[The  questioner  was  Mr.  Charles  Wood,  afterwards  Lord 
Halifax;  the  answers  were  from  Mr.  John  Horsley  Palmer, 
a  Director  and  sometime  Governor  of  the  Bank  of 
England.] 

II 42.  As  it  was  mainly  your  evidence  given  before  the 
Bank  Charter  Committee  in    1832,  which  contained  the 


225 


National    Monetary     Commission 

exposition  of  the  principle  by  which  in  ordinary  times  the 
Bank  is  guided  in  the  regulation  of  its  issues,  will  you  have 
the  goodness  to  restate  that  principle  to  the  Committee  ? 
I  will  restate  it  in  as  nearly  the  same  words  as  I  can. 
The  principle,  with  reference  to  the  period  of  a  full  cur- 
rency, and  consequently  par  of  exchange,  by  which  the 
Bank  has  been  guided  in  the  regulation  of  its  issues, 
always  excepting  special  circumstances,  has  been  to  retain 
an  investment  in  securities,  bearing  interest,  to  the  extent 
of  two-thirds  of  their  liabilities,  the  remaining  one-third 
being  held  in  bullion  and  coin ;  the  reduction  of  the  circu- 
lation, so  far  as  may  be  dependent  upon  the  Bank  being 
subsequently  solely  affected  by  the  foreign  exchanges  or 
by  internal  extra  demand. 

1 143.  Did  you  not  also  state  it  as  desirable,  in  ordinary 
circumstances,  that  the  securities  should  be  retained  at 
nearly  the  same  amount  ? 

Yes;  the  object  of  retaining  a  fixed  amount  of  securities 
by  the  Bank  at  the  period  alluded  to  and  continuing  it 
afterwards,  so  far  as  may  be  practicable,  is  to  throw  the 
action  of  the  increase  or  decrease  in  the  circulation  upon 
the  public,  with  reference  to  the  state  of  the  foreign 
exchanges,  in  the  import  or  export  of  bullion. 

1 144.  Are  the  answers  which  you  have  now  given  a  fair 
exposition  of  the  principles  upon  which  the  conduct  of  the 
Bank  has  been  regulated  since  the  period  of  the  renewal 
of  its  charter  ? 

I  should  say  certainly,  ahvays  taking  into  consideration 
the  extraordinary  circumstances  that  have  inter^^ened. 

Your  committee  would  upon  this  point  wish  to  call  the 
attention  of  The  House  to  the  evidence  of  the  two  Bank 
Directors  who  have  been  examined,  Mr.  Horsley  Palmer 
and  Mr.  Norman,  from  which  it  appears  that  in  several 
instances  since  1832  the  rule  then  laid  down  has  not  been 


226 


The      English      Banking      System 

adhered  to;  and  doubts  have  been  expressed  as  to  the 
soundness  of  its  principle,  as  appUcable  to  the  Bank  of 
England,  from  its  mixing  up  deposits  and  circulation.  It 
appears,  however,  at  the  same  time,  from  the  following 
questions  and  answers  in  Mr.  Norman's  evidence,  that  the 
Bank  Directors  conceive  that  this  rule  has  received  some 
sort  of  legislative  sanction,  in  consequence  of  which  they 
feel  bound  to  adhere  to  it,  as  nearly  as  circumstances  will 
permit,  and  that  on  a  particular  occasion  they  were  fet- 
tered by  this  impression: 

1890.  Referring  to  the  accounts  of  the  Bank,  does  it  not 
appear  that  the  drain,  in  the  first  quarter  of  1839,  fell 
almost  entirely  on  the  deposits  of  the  Bank,  and  in  no 
degree  upon  the  circulation  ? 

I  believe  that  it  fell  almost  wholly  upon  the  deposits. 

1 89 1 .  The  effect,  then,  which  you  anticipated  in  a  former 
part  of  your  evidence,  from  any  reduction  of  circulation 
during  a  drain,  did  not  take  place  during  that  quarter? 

No,  not  to  any  considerable  extent. 

1892.  Would  it  not  have  been  expedient  that  the  Bank 
should  in  that  quarter  have  taken  some  further  measures 
for  the  reduction  of  the  circulation,  looking  to  the  rapid 
drain  which  was  going  on  ? 

The  Bank  considered  itself  at  that  time  bound  to  adhere 
as  nearly  as  it  could  to  the  principle  of  holding  a  fixed 
amount  of  securities,  that  principle  having  been  to  a  cer- 
tain extent  recognized  by  the  legislature  and  the  public; 
but,  if  I  am  asked  now,  with  my  present  experience, 
whether  it  would  not  have  been  wise  in  the  Bank  to  have 
taken  earlier  measures,  I  must  say  that  I  think  it  would 
have  been  wise  so  to  do. 

Without  entering  into  the  question  either  of  the  sound- 
ness of  the  rule,  or  of  the  degree  of  sanction  which  it  may 


227 


National    Monetary     Commission 

be  supposed  to  have  received  from  the  Legislature,  your 
Committee  are  clearly  of  opinion  that  such  an  impression 
on  the  part  of  the  Directors  of  the  Bank  of  England  ought 
not  to  prevent  them  from  adopting  any  other  principle  of 
management  which,  after  tlieir  further  experience,  and 
upon  mature  consideration,  they  may  consider  to  be 
better  adapted  for  the  primary  object  of  preserving,  under 
all  circumstances,  the  convertibility  of  their  notes." 
August  7,  1840. 

extract  from  evidence,  secret  committee  on  commer- 
cial distress,  house  of  commons,  1 848. 

[The  next  occasion  when  these  questions  came  under 
notice  was  after  the  crisis  of  1847.  The  quotations  which 
follow  are  from  the  evidence  given  before  the  above-named 
committee.  The  questioner  was  Mr.  James  Wilson,  the 
founder  of  the  Economist  newspaper;  the  answers  by 
Mr.  S.  Jones  Loyd,  a  leading  Banker  in  London.] 

5206.  Seeing  that  formerly  the  Bank  was  obliged  to  pay 
its  notes  in  bullion,  if  the  Bank  had  paid  proper  attention 
to  the  obligation  that  it  had  to  pay  tliose  notes,  and  not  to 
stop  payment,  would  not  the  Bank's  holding  at  all  times  a 
sufficient  reserve  of  gold  practically  have  had  the  same 
operation  upon  the  action  of  the  Bank  as  the  operation  of 
the  Act  of  1S44? 

The  gist  of  the  question  turns  entirely  upon  the  suppo- 
sition involved  in  it,  viz,  that  the  Bank  paid  proper  atten- 
tion to  the  obligation  which  it  had  to  pay  its  notes,  and 
under  that  supposition  it  is  perfectly  true  that  the  opera- 
tion would  be  the  same  as  under  the  Act  of  1S44;  and  that 
at  once  brings  out  the  distinction  between  the  Act  of  1844 
and  the  previous  system.  The  Act  of  18 19  ordained  specie 
payments,  but  it  took  no  measures  toward  securing  or 
carrying    out    that    ordinance.     Then    the  Act    of    1844 


228 


The      English      Banking      Sy  stem 

rendered  compulsory  the  measures  which  were  necessary 
for  securing  the  convertibiUty  of  the  notes;  if,  therefore, 
you  put  a  case  which  involves  the  supposition  that  the 
Bank  previously  did  all  that  it  was  right  for  them  to  do 
to  carry  out  the  Act  of  1819,  then  upon  that  supposition 
the  course  of  things  preceding  the  Act  of  1844  will  be 
identical  with  the  course  of  things  under  the  Act  of  1844; 
but  we  had  repeated  experience  that  that  could  not  be 
relied  upon,  and  that  the  Bank  repeatedly  failed  in  doing 
what  was  wise  and  necessary,  and  that  caused  tlie  passing 
of  the  Act  of  1844.  The  Act  of  1844  is  based  upon  the 
assumption  that  repeated  experience  had  proved  that  that 
which  it  was  wise  and  necessary  to  do  in  order  to  secure 
specie  payments  had  not  been  done,  and  it  was  passed  to 
secure  that  henceforth  it  should  be  done, 

5207.  Then  the  Act  was  passed  with  a  view  to  make  the 
Bank  of  England  do,  luider  the  Act  of  Parliament,  that 
which  they  had  not  formerly  done,  in  the  exercise  of  a 
wise  discretion? 

It  was  passed  for  the  purpose  of  securing  by  law  the 
proper  course  being  taken  for  protecting  the  converti- 
bility of  the  note,  which  we  had  found,  by  previous 
experience,  could  not  be  safely  intrusted  to  any  dis- 
cretionary action. 

EXTRACT     FROM     EVIDENCE,    SECRET     COMMITTEE     OF    THE 
HOUSE   OF   I.ORDS,  COMP/[ERCIAIv  DISTRESS,   1 847-48. 

[The  Questioner  was  the  Lord  President,  Plenry,  Marquess 
of  Lansdowne;  the  answers  by  Mr.  John  liorsley  Palmer, 
a  Director  of  the  Bank  of  England,  and  formerly  Gov- 
ernor.] 

730.  The  Act  of  1844  prescribes  the  same  Rule  of  Action 
to  the  Bank  whether  the  Foreign  Exchanges  are  in  favor 
or  whether  the  Foreign  Exchanges  are  against  the 
Country  ? 

Certainly. 

229 


National    Monetary     Commission 

731.  Do  you,  from  your  Ivxpcrience  connected  with  this 
Subject,  conceive  that  it  is  defensible  in  reasoning  or 
maintainable  in  Practice  that  in  managing  the  Bank  the 
same  Rule  should  be  applied  to  the  Case  whether  the 
Foreign  Exchanges  be  favorable  to  the  Country  or 
adverse  to  the  Country  ? 

I  think  it  is  always  in  the  Power  of  the  Bank  to  protect 
itself  against  a  Foreign  Demand,  but  it  is  totally  impossible 
to  protect  itself  against  an  internal  Demand. 

732.  The  Question  is  with  respect  to  the  Restriction 
imposed  upon  your  Issues  for  the  Accommodation  of  the 
Public,  whether  you  think  that  it  is  defensible  in  Theory 
or  maintainable  in  Practice  that  you  should  have  the 
same  Rule  in  managing  the  Bank  when  the  Exchanges 
are  adverse  and  when  the  Exchanges  are  favorable  ? 

Certainly  not. 

733.  Then  in  that  respect  you  consider  the  Act  of  1844 
to  be  defective  ? 

Manifestly  defective. 

EXTRACT     FROM     EVIDENCE,    SECRET     COMMITTEE    OF   THE 
HOUSE  OF  EORDS  ON  COMMERCIAL  DISTRESS,    I  847-48. 

[The  Questioner  was  the  Lord  President,  Henry,  Mar- 
quess of  Lansdowne;  answer  by  Mr.  James  Morris,  Gov- 
ernor of  the  Bank  of  England.] 

32.  Do  you  think  that  the  Act  began  to  have  any  Opera- 
tion upon  the  practical  working  of  the  Bank  when  the 
Distress  of  1847  began? 

Mr.  J.  Morris.  I  think  we  worked  the  Bank  upon  the 
System  established  by  the  Act  of  1844  ever  since  1840, 
though  the  Accounts  were  mixed  up,  because  there  was  no 
Act  of  Parliament  obliging  us  to  separate  them;  but,  for 
our  own  Guidance,  there  was  a  Separation.  But  I  main- 
tain that  it  was  not  necessary  for  the  Bank  of  England  in 
the  Management  of  its  Affairs  to  have  this  Act  of  Parlia- 


230 


The       English       Banking      System 

inent.  I  maintain  that  the  Bank  was  bound  to  act  upon 
the  Principle  laid  down  in  the  Act  even  though  the  Act  had 
not  existed.  I  stated  so  at  the  time  the  Act  was  passed. 
But  I  have  no  doubt  that  the  Government  was  right  in 
passing  it,  as  a  Security  for  the  Public;  but  it  did  not 
establish  any  new  Principle. 

EXTRACT    FROM     EVIDENCE,    SECRET     COMMITTEE    OF    THE 
HOUSE  OF  LORDS  ON  COMMERCIAL  DISTRESS,   1 847-48. 

[The  Questioner  w^as  the  Lord  President,  Henry,  Mar- 
quess of  Lansdowne ;  answers  by  Mr.  John  Horsley  Palmer, 
a  Director  of  the  Bank  of  England,  and  formerly  Governor.] 

740.  Then  does  it  not  follow  from  the  Evidence  that  you 
have  given  that  a  totally  different  and  opposite  Mode  of 
Treatment  ought  to  be  observed  in  the  Management  of 
the  Currency  in  those  Two  cases,  comprising  a  Foreign 
Efflux  and  a  Home  Demand? 

I  consider  that  against  Foreign  Demand  there  is,  as  I 
have  already  said,  no  Remed}^  so  effective  as  an  Advance 
of  the  Rate  of  Interest.  In  the  Case  of  a  Home  Demand, 
there  would  be  no  just  Cause  for  raising  the  Rate  while 
the  Circulation  might  be  maintained,  and  even  increased, 
by  Accommodation  given  upon  substantial  and  good  Secu- 
rity. In  case  of  a  Home  Demand,  in  a  Time  of  Distress 
of  the  Nature  which  occurred  in  October  last,  there  is  a 
general  Abstraction  of  the  circulating  Medium,  and  it  is 
to  meet  a  Demand  arising  from  that  Abstraction  that  the 
Bank  necessarily  is  applied  to,  when  it  can,  with  perfect 
Safety  to  itself,  give  the  Assistance  without  increasing  its 
Rate  of  Interest. 

741.  Is  not  the  Effect  of  the  Act  of  1844,  under  those 
Circumstances,  to  deprive  the  Bank  altogether  of  its  free 
Agency  in  giving  that  Accommodation  which  you  think  it 
could  under  such  Circumstances  give  with  Safety  to  itself? 

Certainlv- 


231 


National    Monetary     Commission 

742.  When  you  say  "with  Safely  to  itself,"  it  is  hardly 
necessary  to  ask  whether  you  imply  by  that  the  full 
Maintenance  of  the  Convertibility  of  the  Notes? 

Certainly,  always,  excepting  an  internal  Discredit  of 
Paper  Money,  against  which  nothing  can  protect  the  Bank. 

QUOTATIONS  FROM  THE  REPORT,  SECRET  COMMITTEE  OF  THE 
HOUSE  OF  LORDS  ON  COMMERCIAL  DISTRESS,  1 847-48, 
pp.  xxxii-xxxiii: 

The  Conclusion  to  be  drawn  from  the  Authorities  and 
Evidence  cited  in  this  and  the  preceding  Sections  is  that 
it  is  an  Error  to  deal  solely  with  the  positive  Amount  of 
Bank  Notes  in  Circulation,  excluding  the  disturbing  Causes 
which  may  augment  or  diminish  the  Efiiciency  of  those 
Notes;  that  to  apply  one  identical  Rule  to  Cases  where  the 
Exchanges  are  adverse,  or  are  favorable,  is  an  Error  like- 
wise; that  in  both  these  respects  the  Act  of  1844  is  defective, 
and  that  in  consequence  of  these  Defects  it  aggravated  the 
Distress  of  1847,  more  especially  in  the  Months  of  Sep- 
tember and  October,  and  that  it  must  have  a  Tendency  to 
lead  to  the  same  Results  hereafter  whenever  similar  Cir- 
cumstances shall  arise.  The  Committee  will  conclude 
this  Branch  of  the  Subject  by  the  fohowing  Question  and 
Answer  from  the  Evidence  of  the  Governor  of  the  Bank 
(Mr.  James  Morris) ;  questioner,  the  Lord  President,  Henry, 
Marquess  of  Lansdowne. 

148.  In  those  Cases  where  the  Demand  for  Gold  arises 
from  an  internal  Panic,  the  Bank  of  England  is  restrained 
in. its  Banking  Operations  by  the  Act  of  1844  precisely  in 
the  same  Manner  as  it  would  be  restrained  if  there  was  a 
Demand  upon  the  Bank  for  the  Foreign  Exchanges.  Is  not 
that  likely  to  cause  an  Aggravation  of  the  Evil  in  the  Case 
of  an  "internal  Drain?" 

That  was  the  Case  in  October.  It  is  impossible  to 
legislate  for  a  Panic.     We  all  know  that  a  Panic  is  so 


232 


The      English      Banking      Sy  stem 

devoid  of  all  Reason  that  you  cannot  legislate  beforehand 
to  meet  it.  It  was  for  that  Purpose  that  the  Government 
issued  the  Letter  as  a  Corrective  at  that  particular  Moment. 

Extract  from  Evidence,  Secret  Committee  oe  the 
House  op  Lords  on  Commercial  Distress,  1847-48. 

[The  Questioner  was  the  Lord  President,  Henry,  Mar- 
quess of  Lansdowne;  answers  by  Mr.  James  Morris,  Gover- 
nor of  the  Bank  of  England]. 

293  (to  Mr.  Morris).  On  general  Principles,  what  are  the 
Causes  of  an  Internal  Drain  for  Gold  ?  Does  it  arise  from 
Money  being  in  excess  and  Interest  being  low,  or  does  it 
arise  from  Money  being  deficient  for  the  Purposes  of  the 
Country,  and  Interest  being  high  ? 

An  internal  Drain  may  arise  from  Distrust  in  the  Coun- 
try, or  from  an  increased  Demand  caused  by  an  increased 
Want  for  the  larger  Transactions  of  the  Country. 

294.  Then,  in  these  respects,  an  internal  Drain  and  a 
foreign  Efflux  depend  upon  directly  opposite  Princij)les? 

Yes. 

295.  Does  not  the  Act  of  1844  deal  with  these  Two 
Things  precisely  in  the  same  manner  ? 

Yes. 

EXTRACT    FROM    EVIDENCE,    SECRET    COMMITTEE    OF    THE 
HOUSE  OF  LORDS  ON  COMMERCIAL  DISTRESS,   1 847-48. 

[The  Questioner  was  the  Lord  President,  Henry,  Mar- 
quess of  Landsdowne;  answers  by  Mr.  Samuel  Gurney,"] 
Mr.  Samuel  Gurney  was  asked  whether  he  had  formed 
any  opinion  on  the  causes  which  led  to  the  monetary  diffi- 
culties of  the  spring  and  autumn  of  1847.  He  answered 
that  he  had  done  so,  and  was  then  asked.) 

oMr.  Samuel  Gurney  was  a  leading  liill  broker  in  the  cily  cjf  London  at 
that  time. 


'3Z 


National    Monetary     Commission 

1098.  Will  }'ou  be  so  good  as  to  state  that  Opinion, 
accompanying  it  by  any  Explanation  which  you  may  think 
proper  to  give  to  the  Committee  ? 

I  was  hardly  prepared  for  so  very  general  a  Question, 
but  perhaps  it  will  not  be  unsuitable  for  me  to  read  a  Doc- 
ument which  I  have  prepared,  not  for  this  Committee,  but 
to  concentrate  my  Ideas  with  reference  to  the  Subject  of 
the  Question.  The  Crisis  in  April,  1 847,  arose  from  several 
Causes.  The  Failure  of  the  Potato  Crop  and  harvest  in 
1846,  leading  to  an  enormous  Importation  of  Food  com.ing 
upon  an  excited  State  of  Price  and  Transaction,  aided  by 
the  Bank  canvassing  for  Discount  and  fomenting  Transac- 
tions imder  the  new  Principle  that  in  the  Banking  Depart- 
ment they  are  to  act  on  the  same  Principle  as  private 
Bankers,  may  be  considered  as  the  Causes  of  that  Crisis. 
These  led  to  an  Extent  of  Demand  upon  the  Bank  for 
Discount  and  otherwise,  the  yielding  to  which  led  them 
beyond  the  Bounds  of  Prudence,  seeing  the  carl}-  Pay- 
ment of  the  Dividends  was  at  liand.  Under  the  Currency 
Act  they  found  tliemselves  imder  the  Necessity  suddenly 
of  not  only  withdrawing  their  usual  Accommodation  by 
way  of  Discount,  but  of  calling  in  with  a  severe  and  unre- 
lenting Hand  the  Loans  they  had  made  upon  the  Security 
of  Bills,  Exchequer  Bills,  etc.  The  Suddenness  and  Sever- 
ity of  this  Change  was  forced  upon  the  Bank  by  the  Cur- 
rency Act.  Had  it  not  been  for  that,  they  would  have 
spread  over  Months  what  they  felt  themselves  compelled 
to  do  in  a  few  Days,  to  the  serious  Derangement  of  the 
Money  Market  and  to  much  alarming  Disaster.  It  is 
queried,  Was  this  Crisis  owing  to  the  Currency  Act  ?  I 
think  it  cannot  be  fairly  laid  to  the  Act  only,  but  to  the 
Causes  before  specified.  It  may,  however,  with  Truth  be 
asserted,  that  the  Force  of  it  and  the  Evils  of  it  were 
much  aggravated  by  the  Effect  of  this  Act  in  the  Course 
of  Action  it  forced  upon  the  Bank. 


234 


The      English      Banking      Sy  s  t  e  m 

Extract  from  Evidence,  Secret  Committee  oe  the 
House  of  Lords  on  CommerciaIv  Distress,  1847-48. 

[The  Questioner  was  The  Lord  President,  Henry,  Mar- 
quess of  Lansdowne;  answers  by  Mr.  George  Carr  Glyn, 
M.  P.,  a  leading  Banker  in  the  city  of  London  at  that  time.] 

1648.  Will  you  be  so  good  as  to  state  what,  according 
to  your  Opinion,  those  Causes  were,  distinguishing  those 
which  more  particularly  affected  the  Pressure  which 
occurred  in  April,  and  those  which  affected  the  Pressure 
which  occurred  to  a  still  greater  Ivxtent,  later  in  the  Year? 

I  consider  that  the  Pressure  which  occurred  in  April, 
1847,  arose  principally  from  the  large  Importation  of  Corn 
and  other  necessary  Articles  of  Food,  and  I  consider  also 
that  the  Foreign  Exchanges  have  been  affected  by  the 
Operation  of  those  Causes,  the  Pressure  in  point  of  fact 
was  necessary,  and  was  carried  only  to  the  Extent  which 
was  required  for  the  proper  Readjustment  of  the  Foreign 
Exchanges.  The  Foreign  Exchanges  were  readjusted,  and 
in  the  course  of  the  Autumn  set  strongly  in  favor  of  this 
Country.  The  harvest  turning  out  very  good  in  the 
months  of  August  and  September,  large  Failures  occurred 
amongst  the  Speculators  in  Corn.  Those  were  the  first 
Occurrences  of  that  Description  that  took  place  in  this 
Country;  subsequently  they  were  followed  by  large  Fail- 
ures of  other  mercantile  Houses.  That  went  on  down  to 
the  End  of  September,  the  Pressure  gradually  increasing, 
but  not  to  the  Degree  which  it  arrived  at  in  the  Course  of 
the  following  Month,  when  there  was  superadded  to  all 
those  Causes  which  had  been  operating  before  a  great 
Degree  of  Discredit  and  Want  of  Confidence  throughout 
the  Country,  which  was  very  much  increased  by  the 
Failure  of  Banks  in  Liverpool  and  in  other  Parts  of  the 
Country,  and  during  the  Week  ending  the  23d  of  October 
by  a  general  Distrust  that  seemed  to  operate  amongst 
nearly  all  Mercantile  Classes,  and  was  rapidly  extending 


235 


National    Monetary     Commission 

itself  to  the  Banking  Establishments  throughout  the  Coun- 
try, very  much  resembling,  in  point  of  fact,  at  that  Time, 
what  occurred  in  tlie  Year  1825.  The  other  Symptoms  of 
1847  had  been  entirely  dissimilar  up  to  the  Middle  of 
October,  1847;  but  in  the  last  Week  before  the  Issue  of 
the  Government  Letter  the  Symptoms  of  Want  of  Confi- 
dence which  presented  themselves  were  very  much  like  those 
which  occurred  at  the  End  of  1825.  There  appeared  a 
Want  of  Confidence  in  the  Country  generally,  which  caused 
Countr}^  Bankers  to  look  for  the  assistance  of  their  London 
Correspondents,  and  which  apparently,  if  it  had  not  been 
for  the  Letter  of  the  Government,  would  have  gone  to  a 
very  great  Extent.  In  point  of  fact,  the  Difference  between 
the  Two  Periods  of  April  and  of  October  was  extremely 
striking.  The  Pressure  of  April  was  very  soon  over,  and 
the  Bank  did  every  thing  within  its  power  for  the  mer- 
cantile Body  at  the  Time.  Although  they  had  been 
obliged  to  restrict  their  Operations  very  much,  yet  they 
attended  to  the  Applications  made  to  them,  particularly 
those  from  Liverpool  and  some  other  places.  But  the 
Pressure  that  occurred  in  October  last  arose  apparently 
from  entirely  different  Causes.  It  proceeded  from  an 
apprehension  on  the  Part  of  all  mercantile  Men  that  the 
Want  of  Confidence  was  becoming  so  great  that  at  last  the 
Reserves  of  the  Bank  would  be  driven  down  so  very  low, 
that,  in  point  of  fact,  Persons  who  were  possessed  of 
property  would  not  be  able  to  convert  that  Property  into 
Bank  of  England  Notes. 

EXTRACT  FROM  REPORT,  SECRET  COMMITTEE  OF  THE  HOUSE 
OF  EORDS  ON  COMMERCIAE  DISTRESS,   1 847-48. 

[The  Questioner  was  the  Lord  President,  Henry,  Marquess 
of  Lansdowne;  answers  by  Mr.  Samuel  Gumey.] 

1 1 64.  What  do  you  consider  to  have  been  the  Purpose 
of  the  Act  of  1844? 


236 


The       English       Banking      Sy  s  t  e  m 

The  Purpose  of  the  Act  of  1844  was  to  h.ave  our  Cur- 
rency on  a  sound  Basis.     Such  is  its  Theorv. 

1 165.  Do  you  consider  that  that  Purpose  has  been 
effected  ? 

It  is  my  Judgment  that  the  Act  has  failed  in  securing 
Safety. 

1 166.  Was  that  the  Purpose  of  the  Act;  was  it  ever 
stated  as  such  by  high  Authority  ? 

I  think  so,  by  the  Promoters  of  the  BiU,  very  strongly. 
My  Opinion  at  the  Time  was,  that  it  would  have  that  Effect. 
I  thought  it  was  based  on  a  right  and  sound  Theory,  and 
that  it  would  put  People  so  on  their  Guard  that  it  would 
prevent  Panic.  But,  though  I  am  not  prepared  to 
abandon  the  Act  altogether,  I  am  quite  satisfied  that  it 
has  very  much  aggravated  Panic  in  Time  of  Difficulty,  and 
that  a  relaxing  Power  must  be  had;  that  Occasions  w^ill 
occur  when  it  must  be  relaxed. 

1 167.  Can  3^ou  define  the  Circumstances  under  which 
such  a  relaxing  Power  could  be  safely  confided  to  any 
Authority  ? 

I  do  not  think  I  can  answer  that  Question  better  than 
by  giving  a  few  general  Explanations  of  tlie  Panic  of  last 
Autumn. 

1 168.  Will  you  have  the  goodness  to  do  so? 

The  Panic  of  April  very  soon  passed  awa}^  It  was, 
however,  attended  with  great  temporary  Inconvenience, 
yet  it  was  not  so  prolonged  as  to  produce  Failures.  As  I 
stated  before,  in  the  Beginning  of  August  the  Panic,  which 
spread  through  the  Autumn  and  lasted  till  near  the  End  of 
the  Year,  commenced  by  the  Failure  of  many  Houses  in  the 
Corn  Trade.  There  was  a  sufficient  Cause  for  these  Fail- 
ures, which  were  not  owing  to  this  Act  at  all.  Alarm  in- 
creased to  the  Pressure  of  other  Houses;  it  shook  Credit;  and 
other  Houses  which  were  in  dubious  Condition  failed.  Alarm 
increased;  great  Depreciation  in  the  Value  of  mercantile 


237 


National    Mo  n  et  ar  y     Commission 

Property  followed,  and  also  of  funded  Property.  After- 
wards the  Pressure  reached  Houses  that  oui^ht  not  to  have 
failed,  Houses  that  had  been  fairly  conducted,  and  were 
solvent,  Now,  so  far  as  this,  I  think  the  Act  had  not 
much  to  do  with  it.  The  Amount  of  Bullion  in  the  Bank 
remained  large,  not  less  than  eight  millions  Sterling. 
About  the  End  of  September  Alarm  spread  to  a  Fear  of 
getting  Circulating  Medium,  in  consequence  of  the  Restric- 
tion of  the  Act.  The  Bank  raised  their  Rate  of  Interest  very 
high;  that  increased  the  Alarm,  and  a  State  of  extreme 
Panic  was  the  Consequence.  Had  it  not  been  for  the  Alarm 
the  Notes  in  the  Hands  of  the  Public  would  have  been 
superabundant.  We  should  have  had  a  great  Number  of 
Failures  and  a  great  Amount  of  mercantile  Calamity  at  all 
events,  but  we  should  not  have  had  the  same  degree  of 
Calamity  or  Panic,  neither  would  the  Rate  of  Interest  have 
been  so  high.  There  w^as  no  real  Cause  that  the  Rate  of 
Interest  should  have  got  up  to  what  it  did.  The  Extent 
of  the  Calamity  was  the  Effect  of  the  Act  and  the  Act 
only. 

This  evidence,  given  by  Mr.  vSamuel  Gurney,  is  quoted 
in  the  Report,  which  continues:  "Many  other  Statements, 
Authorities,  and  Illustrations  might  be  given,  exemplifying 
the  same  Principles,  and  proving  the  evil  Consequences  of 
disregarding  them;  but  enough  has  been  stated  to  prove, 
in  the  Judgment  of  the  Committee,  that  the  Inflexibility 
of  the  Rule  prescribed  by  the  restrictive  Clauses  of  the  Act 
of  1844  is  indefensible,  when  equally  applied  to  a  State  of 
varying  Circulation ;  and  that  its  Enforcement  in  1847  was 
an  Aggravation  of  the  Com.mercial  Distress,  and  was  there- 
fore wisely  set  aside  by  the  Authorit)'  of  the  Government 
on  the  23d  and  25th  of  October."     [1847.] 


238 


The      English      Banking      Sy  s  t  e 


m 


EXTRACT   FROM  REPORT  AND  EVIDENCE,  SECRET  COMMITTEE 
OE    THE    HOUSE    OF    LORDS    ON    COMMERCIAL    DISTRESS, 

1847-48,  page  xlviii. 

[The  Questioner  was  the  Lord  President,  Henry,  Marquess 
of  Lansdowne;  extract  from  answer  by  Mr.  G.  C.  Glyn, 
M.  P.J 

1782.  If  I  were  to  offer  any  vSuggestion  (which  I  should 
not  have  ventured  to  offer  if  it  had  not  been  asked  from 
me  by  your  Lordships)  I  should  prefer  leaving  the  whole 
Responsibility  of  the  Circulation  in  the  Hands  of  the  Bank 
of  England.  I  do  not  think  there  is  much  Advantage  in  a 
double  Responsibility  divided  between  the  Bank  of  England 
and  the  Government.  But  I  consider  it  would  be  well  that 
the  Bank  Court  should  have  in  it  certain  Persons  not 
elected  by  the  Proprietors,  who  should  be  appointed  under 
Act  of  Parliament  for  a  limited  Time,  or  in  any  other  Way 
which  may  be  deemed  advisable,  not  immediately  by  the 
Government  or  Proprietors,  and  not  removable  by  the 
Government,  and  that  they  should  have,  not  an  absolute 
Veto  upon  the  Proceedings  of  the  Bank  Court,  but  that  if 
they  dissented  from  the  Majority,  their  Reasons  for  that 
Dissent  should  always  be  submitted  in  Writing,  and  that 
they  should  be  laid  before  Parliament,  if  Parliament  saw 
fit,  from  Time  to  Time.  I  think  that  the  Introduction  of 
these  Commissioners  and  their  Protests  and  Influence 
would  exercise  a  very  wholesonic  Control  upon  the  Body 
of  Governors,  and  at  the  same  Tin.ie  would  not  deprive  them 
of  that  Power  of  which  as  representing  the  Proprietors 
it  would  not  be  right  that  they  should  be  deprived. 

1783.  Would  you  add  to  those  Alterations  any  Regula- 
tions with  respect  to  the  Management  of  the  Currency  with 
a  view  to  the  Exchanges,  or  to  any  other  Circumstances? 

I  should  leave  that  to  the  Court  and  to  those  Connnis- 
sioners  to  determine  as  they  saw  fit  from  Time  to  Time. 

76651 — 10 — ■ — 16  239 


National    Monetary     Commission 

1784.  Do  you  consider  tliat  those  Commissioners  should 
be  Persons  not  engaged  in  trade  ? 

I  would  rather  they  were  not  engaged  in  ^frade.  I  think 
you  might  find  People  of  Ivxpcrience  enough  not  engaged 
in  Trade  who  were  fit  for  the  Duty,  but  would  not  make  it 
an  absolute  Condition  of  Eligibility. 

1785.  Do  you  mean  that  they  should  be  appointed  for 
Life? 

Not  for  Life.  It  is  impossible  to  know  beforehand  how 
far  a  Man  may  be  fit  for  a  Position  of  that  Sort,  and  there- 
fore I  would  make  the  Appointment  for  Three  Years,  or  for 
some  Period,  and  renewable. 

Extract  from  Evidence,  Secret  Committee  of  the 
House  of  Lords  on  Commercial  Distress,  1847-48. 

[The  Questioner  was  The  Lord  President,  Henry,  Mar- 
quess of  Lansdowne;  answers  by  Mr.  G.  C.  Glyn,  M.  P.] 

1899.  You  have  stated  that  the  Loss  of  Property  and 
the  Diminution  of  Capital  to  the  commercial  Body  in  the 
City  of  London  in  the  last  Year,  even  where  there  have 
been  no  Failures,  has  been  very  considerable  ? 

Very  considerable  indeed. 

1900.  Beyond  anything  3'ou  have  witnessed  in  the 
Course  of  your  Life? 

Beyond  anything  in  my  Experience,  certainly. 

1901.  Has  not  the  com.mercial  Credit  of  the  City  of 
London  also  in  Foreign  Countries  been  very  much  injured  ? 

Very  much  more  than  I  ever  recollect  it  before. 

1902.  Which  you  consider  a  very  unfortunate  circum- 
stance ? 

Verv  detrimental. 

1903.  Supposing  the  Bank  should  consider  that  it  is 
wise  for  themselves  to  act  upon  the  Restrictions  imposed 
by  the  Act  of  1844,  and  that  they  were  not  compelled  by 


240 


The      English      Banking      Sy  stem 

Law  to  do  so,  would  you  impose  upon  them  a  Restriction 
to  prevent  them  from  so  acting  ? 

Certainly  not.  If  they  choose  to  take  £14,000,000  as  a 
settled  Point,  and  to  act  upon  that,  I  have  no  Objection 
whatever  to  their  regulating  their  Transactions  with  that 
View;  but  if  they  should  find,  from  an  extraordinary 
internal  Panic,  that  the  £14,000,000  ought  to  be  £15,- 
000,000,  I  would  give  them  the  Power  of  extending  their 
Issues,  provided  the  Exchanges  are  in  favor  of  this 
Country. 

1904.  You  would  not  deprive  them  of  the  Power  of 
rigidly  acting  upon  the  Principle  established  by  the  Law 
of  1844? 

Certainly  not.  I  have  no  Objection  to  their  taking 
£14,000,000  as  the  Standard  for  their  general  System. 

1905.  If  you  think  the  Law  as  it  now  stands  is  liable  to 
so  much  objection,  would  it  not  be  advisable  to  prevent 
the  Bank  establishing  such  an  objectionable  System? 

The  Objection  to  the  £14,000,000  Clause  is,  that  it  is  not 
to  be  passed  at  all  under  any  Circumstances.  If  you  leave 
in  the  Hands  of  the  Bank  of  England  the  Power  of  passing 
that,  the  whole  Cause  of  the  Panic  in  October  is  removed, 
according  to  my  View  of  its  Causes. 

1906.  Will  you  state  what  you  consider  exactly  to  have 
been  the  Cause  of  the  Panic  ? 

The  Cause  of  the  Panic,  in  my  opinion,  was  the  Restric- 
tion to  £14,000,000. 

1907.  The  Public  knowing  that  the  Bank  could  not 
issue,  even  if  they  wished  it,  beyond  £14,000,000? 

Yes. 


241 


National    Monetary     Commission 

Extract  from  Report  and  Evidence,  Secret  Com- 
mittee OF  THE  House  of  Lords  on  CommerciaIv  Dis- 
tress, 1847-48,  page  I .     (Quotation  from  the  report.) 

In  Conclusion,  the  Committee  think  it  right  to  add,  that, 
whilst  they  feel  deeply  the  Necessity  of  a  sound  System 
of  Legislation  for  the  Bank  of  England,  and  for  all  other 
Establishments  entrusted  with  the  Privilege  of  issuing 
Notes  used  as  Substitutes  and  Representatives  of  the  cur- 
rent Coin  of  the  Realm,  they  are  far  from  suggesting  that 
it  is  upon  Eaws,  however  wisely  framed  they  may  be,  that 
Reliance  can  or  ought  exclusively  to  be  placed.  The  best 
Banking  System  may  be  defeated  by  imperfect  Manage- 
ment; and,  on  the  other  hand,  the  Evils  of  an  imperfect 
Banking  System  may  be  greatly  mitigated,  if  not  overcome, 
by  Prudence,  Caution,  and  Resolution.  In  the  Confidence 
universally  and  justly  placed  in  the  Bank  of  England  the 
fullest  Testimony  is  borne  to  the  Integrity  and  good  Faith 
with  which  its  great  Transactions  have  been  conducted; 
and  the  Opinion  of  the  Committee  in  this  respect  is  best 
shown  in  their  Desire  to  see  vested  in  the  Bank  a  wider 
Discretion  than  they  possess  under  the  Act  of  1844, — a  Dis- 
cretion which  the  increased  Knowledge  produced  by  Expe- 
rience and  Discussion,  and  in  which  the  Bank  of  England 
can  hardly  fail  to  participate,  will  enable  them  to  exercise 
to  the  Advantage  of  their  own  Corporation,  and  to  their 
own  Honor,  and  to  the  permanent  Benefit  of  the  Public, 
and  more  especially  of  the  Commercial  Classes  of  England. 


242 


Chapter  V. 

REMARKS  ON  THE  BANK  ACT  OF  1844  BY  THE  LATE  DR.  N.  G. 
PIERSON,  SOMETIME  PRESIDENT  OF  THE  BANK  OF  THE 
NETHERLANDS. 

After  considering  this  evidence  we  may  turn  to  Doctor 
N.  G.  Pierson's  history  and  criticism  of  the  currency 
theory  and  the  banking  principle  and  his  remarks  on  the 
Bank  Act  of  1844.  These  give  so  clear  a  statement  of  the 
questions  involved  in  that  Act  that  I  subjoin  them  here. 
Doctor  N.  G.  Pierson  was  for  some  time  President  of  the 
Bank  of  the  Netherlands.  His  practical  knowledge  of 
banking  renders  his  opinions  the  more  valuable.    He  says, — 

' '  On  the  one  side  stood  the  school  of  the  Currency 
Theory,  on  the  other  that  of  the  Banking  Principle. 
The  former  numbered  among  its  adherents  JONES  Loyd, 
better  known  as  Lord  OvERSTONE;  also  Norman  and 
ToRRENS.  The  latter  school  numbered  Tooke,  Wilson, 
and  FuLLARTON.  The  victory  rested  entirely  with  the 
adherents  of  the  Currency  Theory,  and  it  is  on  this  theory 
that  the  English  Bank  Law  of  1844  is  based. 

"The  authorship  of  the  currency  theory  is  wrongly 
ascribed  to  David  Ricardo,  although  it  is  to  him  that  we 
are  indebted  for  the  grain  of  truth  which  it  contains.  The 
nature  of  this  theory  will  appear  from  what  follows. 

"  If,  asks  Lord  OvERSTOne — who  was  the  first  to  pro- 
claim the  currency  theory — there  be  no  bank  notes  in  cir- 
culation in  a  country,  can  there  ever  be  scarcity  of  metallic 
money  in  that  country?  Would  it  be  possible,  for  in- 
stance, for  the  balance  of  payments  of  such  a  country  to 

[N.  O.  Pierson:  Principles  of  Economics,  pp.  454-467.] 


243 


National    Monetary     Commission 

become  so  unfavorable  as  to  cause  all  the  metallic  money 
and  bullion  to  be  exported  ?  The  answer  is,  that  it  would 
not  be  possible;  for,  when  money  is  scarce,  its  value  rises, 
and  prices  fall.  And  when  prices  fall,  exports  increase  and 
imports  diminish,  until  there  is  sufficient  money  and  bullion 
in  the  country  once  more.  A  nation  which  does  not  use 
bank  notes  can  never,  in  the  long-run,  have  too  little 
metallic  money  in  relation  to  other  things.  It  may  be  a 
poor  nation,  certainly,  but  its  capital  will  always  include 
such  a  proportion  of  coined  money  as  shall  be  needful. 

"It  is  different  v/ith  a  country  which  uses  bank  notes  as 
well  as  coined  money;  for,  in  such  a  country,  exportation 
of  the  latter  does  not  necessarily  cause  scarcity  of  money. 
The  balance  of  payments  becomes  unfavorable;  consid- 
erable exports  of  gold  take  place;  but  at  the  same  time, 
by  granting  credit,  the  banks  greatly  increase  their 
uncovered  circulation.  Will  prices  fall  in  this  case  too? 
Will  the  balance  of  payments  change  and  cause  the 
exported  gold  to  return  to  the  country?  There  is  no 
reason  to  expect  that  it  will,  because  no  deficiency  will 
have  arisen  in  the  monetary  circulation.  In  the  first  of 
the  two  cases  described,  the  evil  cures  itself;  in  the  second, 
it  grows  more  acute.  With  a  mixed  circulation — that  is, 
with  a  circulation  consisting  partly  of  metal  and  partly  of 
paper — the  whole  of  the  metal  may  disappear  without 
causing  any  reduction  in  prices. 

"  What  then  are  the  means  which  a  country  using  bank 
notes  should  adopt  in  order  to  prevent  the  whole  of  its 
gold  from  being  exported?  The  law  should  prevent  the 
banks  from  substituting  paper  for  the  exported  metal ;  or, 


244 


The      English      Banking      Sy s  t e 


m 


better  still,  it  should  compel  them  to  reduce  their  uncovered 
circulation  in  proportion  to  the  exports  of  metal.  Sup- 
pose the  stock  of  money  required  in  a  country  to  be 
represented  by  the  figure  loo,  and  to  consist  entirely  of 
gold;  if  a  quantity  of  this  money  corresponding  to  the 
figure  lo  were  to  leave  the  country,  there  would  remain 
90,  consequently  not  enough  to  meet  the  demand,  and  this 
of  itself  would  cause  prices  to  fall.  But  suppose  the 
needful  stock  of  100  to  consist  of  50  parts  gold  and  50 
parts  paper.  In  this  case,  if,  while  10  parts  of  the  metallic 
money  left  the  country,  the  paper  circulation  were 
increased  to  60,  the  total  stock  of  money  would  still 
remain  at  100,  and  therefore  suffice  to  meet  the  demand. 
And  if  a  second  10  parts  of  the  metallic  money  were  to 
leave  the  country  and  to  be  followed  by  a  third  and  fourth 
10  parts,  while  the  paper  circulation  was  increased,  at 
first  from  60  to  70,  then  from  70  to  80,  and  then  from  80 
to  90,  there  would  always  be  a  sufficient  stock  of  money 
in  the  country,  and  the  exported  gold  would  not  return. 
This  must  be  prevented.  A  deficiency  in  the  monetary 
circulation  must  not  be  met  with  paper.  Measures  must 
be  adopted  to  prevent  the  possibility  of  the  whole  of  the 
specie  and  bullion  being  drained  from  a  country,  and  the 
bank  notes  of  that  country  thus  becoming  inconvertible. 

"Such  is  the  currency  theory;  now  let  us  examine  its 
defects.  First  of  all,  it  is  not  true  that  a  bank  invariably 
does  wrong  when  it  supplies  a  deficiency  in  the  monetary 
circulation  by  issuing  notes.  We  forfeit  one  of  the  great- 
est advantages  of  a  well-regulated  banking  system  when 
we  conform  strictly  to  the  currency  theory.     Suppose,  for 


H5 


National    Monetary     Commission 

instance,  that  a  crisis  has  occurred,  and  that  the  demand 
for  money  has  greatly  increased  in  consequence.  WiU  it 
not  have  a  salutary  effect  if  the  bank  of  issue  is  able  to 
meet  this  demand,  and  would  it  not  be  the  height  of  folly 
to  interfere  v/ith  such  action  on  the  part  of  the  bank? 
Or,  suppose  that  the  corn  crop  has  failed,  so  that  it  has 
become  necessary  to  import  large  quantities  of  grain  for 
home  consumption.  Is  it  not  an  advantage  in  such  a 
case  not  to  have  to  part  at  a  given  moment  with  large 
quantities  of  interest-bearing  bonds,  or  cattle,  or  machin- 
ery, or  other  necessaries,  in  order  to  pay  for  the  imports 
of  grain  and  to  be  able  to  pay  for  them  in  the  meantime 
by  exporting  precious  metal,  for  which  paper  can  be  tem- 
porarily substituted?  Steps  must  be  taken  to  ensure  the 
return  of  the  exported  metal;  but  this  need  not  be  done 
immediately.  A  well-managed  bank  always  has  a  larger 
metallic  reserve  than  it  needs  in  ordinary  times,  and  of 
which  it  will  therefore  be  able  to  spare  a  part  in  times  of 
emergency.  When  the  time  of  stress  lias  passed,  the 
bank  will  gradually  restrict  its  credits,  thus  enabling  its 
metallic  reserve  to  accumulate  once  more.  In  the  mean- 
time it  will  have  rendered  a  great  service  to  the  commu- 
nity, for  it  will  have  mitigated  the  adverse  effects  of  the 
crop  failure  by  enabling  them  to  be  spread  over  a  more 
extended  period  of  time. 

"There  is  a  second  mistake  in  the  currency  theory.  It 
is  not  true  that,  in  a  country  where  no  bank  notes  are  in 
circulation,  exportation  of  specie  results  in  an  immediate 
fall  in  prices  and  consequently  in  an  alteration  in  the 
balance  of  payments.     It  would  be  so  if  bank  notes  were 


246 


The      English      Banking      Sy  stem 

the  only  possible  substitutes  for  specie;  but  bank  deposits 
also  serve  as  substitutes  for  specie.  It  has  already  been 
shown,  in  the  chapter  on  prices,  that  bank  notes  and 
bank  deposits  differ  only  in  form,  since  both  take  the 
place  of  specie  when  they  are  not  covered  by  a  metallic 
reserve.  Let  the  needful  stock  of  media  of  payment  be 
represented  by  the  figure  loo,  and  suppose  it  to  be  made 
up  of  specie  and  bank  deposits  each  to  the  extent  of  50. 
If  specie  be  now  exported  to  the  value  of  10,  but  the 
banks  at  the  same  time  grant  credits  to  their  depositors 
to  the  same  amount,  how  is  the  fall  in  prices  to  take 
place,  which  the  supporters  of  the  currency  theory  declare 
to  be  the  inevitable  result  of  the  exportation  of  precious 
metal  from  a  country  where  no  bank  notes  are  in  circu- 
lation? A  bank  of  circulation  issues  notes  payable  to 
bearer,  with  which  people  pay  each  other.  A  deposit 
bank  credits  its  depositors'  accounts  and  the  balances 
produced  in  this  way  also  constitute  a  medium  of  pay- 
ment. Wherein  does  the  difference  lie?  The  difference, 
we  repeat,  is  one  of  form  only. 

"The  exponents  of  the  currency  theory  (with  the  excep- 
tion, perhaps,  of  Torrens)  never  discerned  this.  Bank 
notes  are  money,  said  they,  and  bank  deposits  are  book 
entries.  But  we  are  not  concerned  here  with  calling  notes 
and  bank  deposits  l^y  their  right  names:  the  question 
is,  what  functions  tliey  perform;  whether  both  do  not 
supply  the  place  of  specie;  whether  both  are  not  capable 
of  supplying  a  deficiency  in  the  specie  circulation  of  a 
country  where  the  cheque  is  a  very  common  medium  of 
payment.     The  chief  error  of  Lord  Ovcrstonk  and  his 


247 


National    Monetary     Commission 

followers  certainly  lay  in  their  not  having  understood 
this  clcarlv.  Their  doctrine  was  not  founded  on  a  true 
conception  of  the  bank  deposit.  Between  the  latter  and 
the  bank  note  they  sought  to  establish  a  fundamental 
distinction  which  does  not  exist." 

"To  the  credit  of  their  opponents,  the  "Banking  Prin- 
ciple" men,  it  must  be  recorded  that  they  did  not  fall  into 
this  error.  To  them  the  closeness  of  the  relationship  be- 
tween the  bank  note  and  the  bank  deposit  was  perfectly 
clear,  and  they  may  be  regarded  as  having  rendered  a 
service  in  making  it  more  widely  known.  If  the  contro- 
versy between  the  two  schools  had  been  waged  round  this 
point  alone,  we  should  not  have  a  moment's  hesitation  in 
siding  absolutely  with  the  latter.  But  the  adherents  of  the 
"Banking  Principle"  have  erred  so  egregiously  on  an- 
other point  in  the  controversy  that  we  find  it  difficult  to 
determine  toward  which  of  the  two  sides  we  feel  most  at- 
tracted. 

' '  The  point  to  which  we  allude  relates  to  the  question  as 
to  how  far  a  bank  can  bring  itself  and  the  community  into 
danger  by  an  excessive  issue  of  notes.  The  adherents  of 
the  "Banking  Principle"  hold  that  no  danger  can  be  in- 
curred by  either,  so  long  as  the  notes  remain  convertible.* 

o  We  ought  not,  however,  to  neglect  to  mention  what  George  Clare  says 
in  h.\s  Money-Market  Primer  (London,  1893),  page  14:  "To  understand 
how  differently  the  note  was  then  regarded,  it  must  be  borne  in  mind 
that  in  those  days  a  banker's  circulation  was  his  principal  liability,  and  that 
deposits  were,  in  comparison,  but  a  very  small  item.  In  February  1820, 
to  give  an  instance,  the  circulation  of  the  Bank  of  England  amounted  to 
£23,000,000  and  the  total  deposits  to  £4,000,000;  while  in  February  1890, 
the  figures  are:  Circulation,  £23,000,000;  deposits,  £35,000,000." 

b  The  error  stands  out  most  clearly  in  Fullarton,  On  the  Regulation  0} 
Currencies  (London,  1844),  more  especially  pages  63-65. 


248 


The       English       Banking      Syste  m 

"Should  they  cease  to  be  so,  then  mdeed  too  large  a 
quantity  of  them  may  get  into  circulation,  just  as  may  hap- 
pen in  the  case  of  notes  issued  by  the  Government,  and 
declared  legal  tender  by  enactment.  But  if  the  bank 
paper  be  convertible,  how  can  it  ever  become  redundant? 
What  the  public  has  no  use  for  it  returns  to  the  bank,  whose 
offices  are  always  ready  to  accept  the  paper  in  exchange 
for  specie.  A  bank  can  only  put  a  definite  quantity  of 
notes  into  circulation ;  any  notes  which  it  issues  in  excess 
of  that  quantity  get  returned  to  it  under  an  iron  law,  as  it 
were.  This  is  proved  by  statistics.  When  we  consult  them 
we  are  surprised  to  find  how  little  variation  there  usually 
is  in  the  amount  of  notes  in  circulation.  It  was  by  Tooke 
more  especially  that  a  clear  light  was  brought  to  bear  upon 
this,  and  his  conclusions  have  been  fully  verified  by  later 
investigations.  There  is,  indeed,  a  remarkable  degree  of 
regularity  in  the  demand  for  bank  notes.  We  do  not  dis- 
pute the  contention  of  the  adherents  of  the  "Banking 
Principle,"  that,  so  long  as  bank  paper  is  convertible, 
any  quantity  of  it  issued  in  excess  of  a  certain  sum  gets 
returned  to  the  bank  at  once. 

"It  is  strange,  however,  that  people  should  ever  have 
imagined  that  this  constituted  a  safeguard  against  the 
consequences  of  im.prudent  bank  management.  It  is  pre- 
cisely in  the  return  of  the  notes  to  the  bank  that  the  danger 
lies.  If  the  notes  did  not  return,  the  bank  that  issued  them 
could  never  get  into  difficulties.  The  fact  is,  however, 
that  these  institutions  give  rise  to  a  very  serious  condition 
of  things  if  they  isBSue  notes  to  excess. 


249 


National    Monetary     Commission 

"  Kor  how  do  the  notes  return?  By  repayment  of  ad- 
vances? Do  we  learn  from  the  statistics,  which  Tooke 
and  others  have  compiled  with  so  much  care,  that  when  a 
bank,  by  granting  credit  too  freely,  issues  paper  in  excess 
of  the  requirements  of  trade,  the  public  repays  its  out- 
standing loans,  maturing  bills  are  met  and  no  fresh  ones 
are  discounted,  so  that  in  this  way  the  circulation  is  once 
more  reduced?  Quite  the  contrary:  the  statistics  show 
that  the  redundant  notes  are  offered  in  exchange  for 
specie,  or  used  in  purchasing  bullion  from  the  bank,  the 
specie  or  bullion  being  then  exported.  In  this  way  the 
amount  of  the  circulation  continues  the  same,  it  is  true, 
but  its  components  are  no  longer  the  same;  "uncovered" 
is  substituted  for  "covered"  circulation,  and  the  ratio 
between  metallic  reserve  and  note  circulation  becomes  less 
favorable.  This  matter  has  already  been  explained, 
but  it  is  so  important  that  we  propose  to  discuss  it  here 
once  more. 

"  Besides  loans  out  of  its  own  capital,  let  us  suppose  that 
the  bank  has  granted  advances  to  the  amount  of 
£10,000,000;  in  addition,  it  has  circulated  £8,000,000  in 
notes  in  return  for  bullion  and  specie.  The  bank  has 
now — 

A  covered  circulation  of £10,000,000 

An  uncovered  circulation  of 8,000,000 

Thus,  its  note  circulation  amounts  to  £18,000,000,  against 
which  it  holds  a  metallic  reserve  of  £8,000,000.  It  grants 
loans  for  a  further  £2,000,000,  but  the  public  does  not 
require  more  than  £18,000,000  in  notes;  the  extra 
£2,000,000  put  into  circulation  will  therefore  cause  a 
redundancv  of  money.     It  now  becomes  advantageous  to 


250 


The      English       Banking      System 

export  coin  or  bullion,  and  that  coin  or  bullion  is  obtain- 
able at  the  bank  in  exchange  for  notes.  Certainly  the 
£2,000,000  in  notes  will  now  return  to  the  bank  in  accord- 
ance with  the  "Banking  Principle."  But  will  this  have 
no  effect  upon  the  position  of  the  bank  ?  Its  circulation 
will,  before  long,  be  made  up  as  follows: 

Uncovered £12,  000,  000 

Covered 6,  000,  000 

"The  note  circulation  will  remain,  as  before,  £ 1 8,000,000, 
but  instead  of  £8,000,000,  only  £6,000,000  in  metal  will 
be  held  as  a  reserve  against  it.  The  bank  may  pursue 
this  course  for  a  long  time.  It  may  increase  its  loans  up 
to  £18,000,000,  the  amount  of  its  note  circulation  remain- 
ing all  the  while  at  the  old  figure.  But  how  will  matters 
then  stand  as  regards  metallic  reserve;  that  is  to  say,  as 
regards  the  convertibility  of  the  notes  ?  The  whole  of  the 
reserve  will  have  been  exhausted. 

"  Tooke's  statistics  plead  against  him  instead  of  for  him. 
It  is  just  because  of  there  being  a  limit  to  the  amount  of 
notes  which  a  bank  can  keep  in  circulation  that  an 
excessive  paper  issue  becomes  possible.  For  the  paper 
issue  becomes  excessive  from  the  moment  tliat  a  dispro- 
portion exists  between  the  amount  of  notes  in  circulation 
and  the  amount  of  metal  held  in  reserve  against  them. 

"  '  The  question  of  banks  of  issue  will  always  be  misun- 
derstood, and  all  discussions  on  the  subject  mere  fencing 
with  big  words,  so  long  as  people  fail  to,  realize  that  a 
bank,  when  issuing  paper,  is  simply  an  instrument  in 
the  hands  of  the  public'  Thus  wrote  a  Dutch  adherent 
of  the  "Banking  Principle"  several  years  ago."     So  far  as 

ODE  GiDS  (1863),  vol.  iii,  p.  39. 


251 


National    Monetary     Commission 

concerns  the  amount  of  its  circulation,  a  bank  is  undoubt- 
edly an  instrument  in  the  hands  of  the  public;  but  it  is 
not  the  instrument  of  the  public  in  the  matter  of  the  items 
which  go  to  make  up  that  amount,  and  it  is  these,  more 
especially,  that  one  has  to  consider  when  judging  whether 
a  note  issue  is  excessive  or  not. 

"  We  should  not  care  to  give  our  undivided  sympathy  to 
either  of  the  two  schools  referred  to,  but  that  of  the 
"Banking  Principle"  erred  in  a  more  dangerous  manner 
than  its  rival.  If  it  had  got  the  upper  hand  in  England, 
the  regulation  of  the  banking  system  in  that  country 
would  certainly  have  been  far  less  minute  in  its  character 
than  we  now  find  it;  the  Bank  of  England  would  have 
been  allowed  greater  freedom  of  action,  and  it  must  be 
admitted  that  this  would  have  been  productive  of  a  certain 
advantage  in  times  of  crisis.  But  would  this  freedom^  of 
action  never  have  been  abused?  Would  the  events  of 
1826  and  1839  never  have  repeated  themselves?  Walter 
BagehoT"  was  no  adherent  of  the  "  Currency  Theory,"  and 
consequently  no  admirer  of  the  Bank  Act  passed  in  1844 
under  the  influence  of  that  theory;  and  yet  he  has  fre- 
quently said  in  his  journal.  The  Economist,  when  he  was 
its  editor,  that  although  the  Act  of  1 844  had  not  prescribed 
any  excellent  rules,  still  it  had  not  left  it  to  the  discretion 
of  the  Bank  Directors  to  determine  what  rules  should  be 
observed  in  the  management  of  the  Bank,  and  that  this 
was  one  of  its  good  features. 

a  Note  by  Sir  R.  H.  Inglis  Palgrave.  The  expression  of  Bagehot's  opinion 
on  the  working  of  the  Bank  Act  in  the  crisis  of  1866  will  be  found  in  the 
quotations  from  "The  Economist"  on  page  217. 


25' 


The      English      Banking      Sy  stem 

Section  3. — The  Ba?ik  Act  of  1844, 

"L-et  us  now  examine  the  main  features  of  the  Act  of 
1844 — the  "  Peel  Act,"  as  it  is  usually  called.  At  first  its 
provisions  related  to  the  Bank  of  England  alone,  but  in 
1845  clauses  were  added  having  reference  to  the  other 
banks  of  issue.  We  will  begin  with  those  relating  to  the 
Bank  of  England.  As  a  justification  of  the  detailed  treat- 
ment accorded  to  this  part  of  our  subject,  it  is  to  be 
observed  that  the  London,  money  market  is  of  great 
importance  and  that  its  condition  is,  as  a  rule,  reflected  in 
the  Weekly  Return  of  the  Bank  of  England.  The  Return 
owes  its  very  peculiar  form  to  the  provisions  of  the  Act  of 
1844. 

"The  principle  accepted  is  as  follows.  The  Bank  issues 
notes,  and  it  does  other  banking  business  as  well.  In 
respect  to  the  former  it  has  no  freedom  of  action  what- 
ever; in  respect  to  the  latter  its  freedom  of  action  is  com- 
plete. In  other  words,  the  Bank  is  a  bank  of  issue  and 
also  a  bank  of  deposit.  In  the  former  capacity  it  is  bound 
by  strict  rules;  in  the  latter  it  may  do  as  it  pleases. 

"  The  Bank  consists  of  two  departments,  an  Issue  Depart- 
ment and  a  Banking  Department.  The  Issue  Department 
is  a  bank  of  issue  pure  and  simple;  a  bank  of  issue,  how- 
ever, which  must  not  allow  its  paper  issue  to  exceed  a  cer- 
tain figure.  This  department  may  issue  notes  up  to  any 
figure  it  pleases,  so  long  as  the  issue  is  effected  in  exchange 
for  gold ;  but  it  must  not  grant  credit  be3^ond  a  certain 
maximum  figure.  This  maximum,  originally  fixed  at 
£14,000,000,  is  increased  whenever  any  other  bank  of 
issue  in  England  or  Wales  abandons  or  forfeits  its  right 
to  issue  notes.  The  increase  amounts  to  two-thirds  of 
the  amount  of  the  uncovered  notes  which  such  bank  was 


253 


National    Monetary     Commission 

authorized  to  have  in  circulation.  In  this  way  the  maxi- 
mum has  by  now  (February,  1896)  grown  to  £16,800,000." 
Thus  the  simi  of  £16,800,000  may  be  invested  in  interest- 
bearing  securities  by  the  Issue  Department.  The  Act  con- 
tains no  provisions  restricting  the  Department  in  its  choice 
of  investments.  It  may  buy  bonds  and  shares,  discount 
bills,  or  grant  loans,  according  to  its  discretion. 

' '  But  the  sum  standing  at  the  disposal  of  the  Issue  De- 
partment for  all  these  purposes  is  smaller  than  it  appears. 
There  is  an  inalienable  Government  Debt  amounting  to 
£11,015,000,  in  which  the  bulk  of  the  £16,800,000  is 
invested.  The  balance  amounts  to  £5,785,000^  only. 
Let  us  see  what  becomes  of  that  balance.  The  artificial 
character  of  the  whole  system  will  thus  reveal  itself  to  us. 

"The  Issue  Department  gives  this  sum  to  its  sister 
branch,  the  Banking  Department,  in  exchange  for 
£5,785,000^  in  various  securities.  These  securities  appear 
in  the  Bank  Return  under  the  heading  of  "Other  Securi- 
ties," immediately  below  the  item  "Government  Debt." 
Both  Departments  benefit  by  this  exchange :  the  one,  inas- 
much as  it  secures  an  investment  for  the  balance  of  its 
£16,800,000;  the  other,  inasmuch  as  it  obtains  the  disposal 
of  bank  notes  to  the  amount  of  £5,785,000.^  It  can  employ 
these  in  its  own  business,  like  any  other  deposit  bank  that 
has  borrowed  money  from  another  institution.'^  The  trans- 
action might  also  be  described  by  saying  that  the  Banking 
Department  re-discounts  a  part  of  its  bills  of  exchange  with 
the  other  Department,  transfers  to  the  other  Department  a 
part  (viz,  £5,785,000)^  of  its  loan  business. 

a  The  amount  July,  1910,  is  £18,450,000. 

b  This  figure  refers  to  the  issue  in  February,  1896. 

c  Dr.  Pierson  does  not  appear  to  have  been  aware  that  the  profit  on  the 
amount  of  the  Fixed  Issue  in  excess  of  that  authorized  by  the  Act  of  1844 
is,  in  accordance  ^^dth  Sec.  IX  of  the  Act,  allowed  to  the  public. 


-254 


The      English      Banking      System 

"But  the  Banking  Department  receives  other  notes  as 
well.  It  acts  as  banker  for  the  Government,  to  whom  it 
generally  owes  from  £4,000,000  to  £9,000,000  ("Public 
deposits"),  and  for  many  private  individuals  and  corpo- 
rations, to  whom  it  owes  variable  amounts  ("Other  De- 
posits ")."  Of  all  these  sums  it  invests  just  as  much  or  as 
little  as  it  deems  most  prudent,  and  it  does  so  in  all  kinds 
of  ways.  It  buys  Government  securities,  it  discounts  bills, 
and  grants  loans  (the  amount  due  to  it  in  respect  of  such 
discounts  and  loans  appears  in  the  Return  under  "Other 
Securities"),  but,  like  a  prudent  banker,  it  always  takes 
care  that  a  part  of  the  notes  which  it  receives  are  kept 
and  not  invested.  For,  apart  from  the  comparatively 
small  quantity  of  specie  always  kept  on  hand  in  the 
Banking  Department,  the  liabilities  of  that  branch  are  not 
secured  by  any  metallic  reserve.  If  the  Government  or 
any  private  depositor  draws  on  the  Bank  for  a  portion  of 
what  it  owes  them,  the  Banking  Department  can  only 
make  use  of  its  stock  of  notes  to  meet  the  demand.  It 
would  apply  in  vain  for  assistance  to  the  Issue  Department. 
That  branch  has  already  given  it  all  the  paper  which  it  is 
authorized  to  circulate  otherwise  than  in  exchange  for 

a  The  "Other  Deposits,"  also  called  "Private  Deposits,"  amounted  to 
£25,000,000  sterling  at  the  end  of  1885,  and  to  £48,500,000  sterling  at  the 
end  of  1895.  They  consist  to  a  very  large  extent  of  moneys  belonging  to 
private  banks,  it  being  the  custom  of  such  banks  to  deposit  with  the  Bank 
of  England  such  moneys  as  they  are  neither  obliged  to  retain  for  immediate 
use  at  their  own  offices,  nor  disposed  to  put  out  at  interest.  How  far  the 
item  "Private  deposits"  is  made  up  of  the  deposits  of  private  banks  it  is 
impossible  to  say,  for  since  1877  it  has  not  been  the  practice  of  the  Bank 
cf  England  to  publish  this  figure;  the  amount  must  be  very  large,  however. 
In  1877  all  except  £1 1,000,000  of  the  "  Private  Deposits"  consisted  of  de- 
posits of  private  banks. 


76651—10 17  255 


National    Monetary     Commission 

gold,  and  must  not  issue  a  single  pound  sterling  beyond 
that  sum.  The  foregoing  shows  the  principle  adopted — 
Lord  OvERSTONE's  theory  put  into  practice." 

a  "  For  the  convenience  of  the  reader  we  subjoin  a  balance-sheet  of  the 
Bank  of  England,  with  a  few  explanatory  observations.  This  is  the  weekly- 
Return  for  December  24,  1894.  When  comparing  it  with  corresponding 
weekly  returns  issued  by  foreign  banks  we  must  bear  in  mind  that  assets 
always  appear  on  the  right  and  liabilities  on  the  left-hand  side  of  an  English 
balance-sheet.     In  foreign  balance-sheets  the  reverse  order  is  adopted. 


Notes  Issued. 


ISSUE   DEPARTMENT. 
£58,  367,  000 


58,  367,000 


Government  Debt £11,015,000 

Other    Securities    (the 

securities     taken 

over  by  the  Bank  in 

exchange  for  notes) .  5,785,000 
Gold  coin  and  bullion _      41,567,000 


58,367,000 


BANKING   DEPARTMENT. 


Proprietors'  capital £14,553,000 

Rest  (undivided  prof- 
it)   3,090,000 

Public  deposits 9,451,  000 

Other  deposits 48,  498,  000 

Seven-day     and     other 

Bills 118,000 


75,  710,  000 


Government  Securities 
(to  be  carefully  dis- 
tinguished from  the 
Government  Debt  of 
the  Issue  Depart- 
ment)  £14,936,000 

Other  Securites 
(chiefly  discounted 
paper) 26,616,000 

Notes 32,093,000 

Gold  and  silver  coin  _  _         2,  065,  000 


75,  710,  000 


[December  24,  1894.] 

"  The  expression  A'^otej/^5Me(/ would  be  quite  wrong  if  it  had  reference  to 
the  Bank  as  a  whole,  for,  as  the  above  statement  shows,  no  less  than 
£32,093,000  of  the  total  sum  of  £58,367,000  were  in  stock  at  the  Bank, 
so  that  the  real  amount  of  the  Notes  Issued  was  only  £26,274,000.  But 
the  expression  is  used  only  with  reference  to  the  Issue  Department,  which 
is  regarded  as  having  as  little  concern  with  the  affairs  of  the  Banking 
Department  as  if  the  latter  were  a  separate  corporation." 


256 


The       English       Banking      System 

"The  stock  of  money  in  the  Banking  Department  is 
called  the  "Reserve,"''  and  probably  no  other  banking 
figure  excites  the  interest  of  so  wide  a  circle  of  persons. 
Scarcely  has  the  Bank  issued  its  weekly  Return,  when  the 
amount  of  the  "Reserve" — together,  in  most  cases,  with 
the  ratio  between  that  amount  and  the  deposits — is 
telegraphed  to  nearly  every  part  of  the  civilized  world. 
No  paper,  whose  practice  it  is  to  report  on  the  state  of 
the  money  market,  fails  to  supply  this  item  of  informa- 
tion to  its  readers,  and  no  wonder,  considering  how 
important  it  is.  Imagine  the  condition  of  the  London 
market  if  the  "Reserve"  were  to  give  out!  The  notes  of 
the  Bank  of  England  might  still  remain  convertible.''  but 
the  Bank  would  be  unable  to  meet  any  demand  for  the 
withdrawal  of  deposits,  nor  would  it  be  free  to  increase 
its  credit  business  in  the  very  slightest  degree.  This 
would  spell  embarrassment  for  all  those  who  had  counted 
upon  receiving  assistance  from  it.  In  ordinary  times 
sound  bills  of  exchange  are  regarded  almost  in  the  light 
of  money,  because  money  can  always  be  obtained  for 
them.  When  people  find  themselves  disappointed  in 
this  respect,  they  are  apt  to  become  involved  in  serious 
difficulties. 

"The  Peel  Act  had  scarcely  been  in  operation  three  years 
when  such  a  state  of  things  very  nearly  came  about.  In 
the  autumn  of  the  year  1847  a  commercial  crisis  occurred 

f^  The  expression  "Stock  of  Notes"  is  also  used,  it  is  true,  but  in  that 
case  "Gold  and  Silver  Coin"  is  not  included. 

^  That  is,  assuming  that  it  would  be  permissible  for  the  Issue  Department 
to  cash  the  notes,  even  when  the  banking  department  was  no  longer  able 
to  discharge  its  obligations,  which,  from  the  legal  point  of  view,  seems 
doubtful. 


257 


National    Monetary     Commission 

in  England.  The  peculiar  feature  of  a  commercial  crisis 
is  the  strong  demand  for  money  which  invariably  accom- 
panies it.  Many  people  then  dispose  of  their  goods,  and 
prefer  to  do  so  for  ready  money.  Having  sold  their  goods, 
they  keep  their  money,  as  they  have  no  inclination  for 
investing  it.  Owing  to  this,  the  demand  for  money  is 
increased  in  a  special  degree.  At  such  a  time  a  central 
bank  can  render  signal  service,  for,  by  reason  of  the  un- 
shaken confidence  which  it  usually  continues  to  enjoy  even 
in  a  crisis,  it  can  easily  satisfy  the  demand  for  money  by 
issuing  notes.  Under  ordinary  circumstances  a  bank, 
when  it  increases  its  uncovered  note  circulation,  diminishes 
its  stock  of  gold — that  is  to  say,  the  metallic  reserve  which 
it  holds  against  those  notes.  But  in  a  time  of  commercial 
crisis  the  notes  are  simply  kept  and  stored ;  at  such  a  time 
they  serve  more  as  an  investment  than  as  a  medium  of 
exchange.  By  issuing  notes  extensively  at  such  a  time, 
the  bank  causes  no  danger;  on  the  contrary,  it  allays  much 
anxiety.  As  a  rule,  a  crisis  is  nowhere  so  acute  as  in  a 
place  where  a  central  bank  either  does  not  exist,  or  is 
hampered  by  too  stringent  rules  in  the  matter  of  in- 
creasing its  note  circulation. 

"The  latter  was  the  case  in  England  in  October,  1847, 
and  it  then  became  evident  how  greatly  the  Peel  Act  had 
hampered  the  action  of  the  Bank;  or  rather,  what  a  won- 
derful mixture  of  liberty  and  restraint  the  provisions  of 
that  Act  embodied.  With  regard  to  deposits  the  law 
prescribes  no  rules  whatever;  the  Bank  is  free  to  grant 
loans  on  an  extensive  scale  during  the  time  preceding  a 
crisis,   provided  they  be  effected  by  crediting  the  bor- 


258 


The      English      Banking      System 

rowers'  accounts  in  the  books  of  the  Bank,  and  not  by 
giving  them  bank  notes.  But  when  the  crisis  has  set  in, 
and  those  who  have  accounts  with  the  Bank  apply  for 
notes  to  the  amount  standing  to  their  credit,  or  ask  for 
n^w  loans — this  time  in  the  form  of  notes, — loans  which 
the  Bank  could  grant  more  confidently  at  such  a  time  than 
at  any  other,  in  steps  the  law  and  says  that  no  single 
uncovered  bank  note  shall  be  circulated  over  and  above 
so  and  so  many  millions  of  pounds  sterling. 

"Needless  to  say,  such  a  rule  could  not  be  strictly  main- 
tained when  its  harmful  effects  were  felt.  On  October  25, 
1847,  the  Government  allowed  the  Bank,  subject  to  certain 
conditions,  to  increase,  temporarily,  its  uncovered  note 
circulation  beyond  the  statutory  amount.  Similar  per- 
mission was  again  accorded  on  November  13,  1857,  on 
the  occasion  of  another  crisis;  and  once  again,  on  May  12, 
1866,  after  the  failure  of  OverEnd,  Gurney  &  Co.  Thus, 
on  three  different  occasions  has  the  Peel  Act  been  sus- 
pended, and  on  each  occasion  has  its  suspension  put  an 
end  to  the  crisis.  What  a  curious  law,  one  is  tempted  to 
exclaim,  which  can  only  remain  on  the  Statute  Book 
because  the  Government  allows  it  to  remain  inoperative 
at  the  most  critical  moments! 

"But  we  judge  the  Peel  Act  too  unfavorably  when  we 
confine  ourselves  to  observing  how  it  operates  in  times  of 
commercial  crisis.  One  good  feature  of  the  law  is,  that  it 
obliges  the  Bank  to  make  proper  provision  for  a  metallic 
reserve.  Moreover,  things  which  the  Act  should  have 
prescribed  have  been  gradually  brought  about  by  custom. 
Thus,  although  the  Act  lays  down  no  rule  concerning  the 


259 


National    Monetary     Commission 

Reserve  of  the  Banking  Department — that  is  to  say,  con- 
cerning the  ratio  to  be  maintained  between  that  Reserve 
and  Deposits — yet  it  is  universally  looked  upon  as  the  duty 
of  the  Bank  to  see  that  that  ratio  does  not,  under  ordinary 
circumstances,  fall  below  two-fifths.  It  is  usually  much 
higher  than  this."^  If  the  Reserve  threatens  to  become 
too  low,  the  financial  papers  raise  an  alarm  and  remind  the 
Bank  of  its  duty.  The  effect  is  salutary.  The  Act  says 
that  the  Banking  Department  shall  not  receive  notes  from 
the  Issue  Department  beyond  a  fixed  sum,  now  £5,785,000;^ 
custom  says  that  out  of  this  sum  and  out  of  the  notes  which 
the  Banking  Department  receives  from  the  public,  that 
department  shall  always  keep  in  reserv^e  an  amount  cor- 
responding approximately  to  two-fifths  of  the  deposits. 
Thus  law  and  custom  together  bring  about  a  condition  of 
things  which  may  be  regarded  as  fairly  satisfactory. 
Since  May,  1866,  the  Government  has  not  had  occasion  to 
sanction  any  suspension  of  the  operation  of  the  Peel  Act." 
The  quotation  from  Dr.  N.  G.  Pierson's  "  Principles  of 
Economics,"  Vol.  I,  pp.  464-467,  is  instructive  to  us  as 
showing  the  opinion  of  a  man  who  was  both  an  economist 
and  a  practical  Banker  on  the  working  of  the  Bank  Act  of 
1844.  Doctor  Pierson  was  for  several  years  the  President 
of  the  Bank  of  the  Netherlands,  and  must  have  known  from 

"o  From  1844  to  1878  it  averaged  39.4,  but  in  recent  times  it  has  been 
much  larger.  It  amounted  to  44  per  cent  of  deposits  at  the  end  of  1892, 
45  per  cent  at  the  end  of  1893,  63  per  cent  at  the  end  of  1894,  and  58  per 
cent  at  the  end  of  1895 

"From  1 88 1  to  1890  it  was  never  less  than  £9,200,000,  and  amounted 
on  the  average  to  £13,100,000. 

"  b  Amount  stated  as  that  of  the  Other  securities  referred  to  in  the  figures 
of  the  Issue  Department  given  by  Dr.  N.  G.  Pierson,  p.  252. 


260 


The       English       Banking      System 

experience  that  a  Bank  "when  issuing  paper  is  simply  an 
instrument  in  the  hands  of  the  pubHc. "  Bank  notes  are 
now  no  longer  in  England  the  means  by  which  the  ordinary 
business  of  the  country  is  carried  on.  They  are  valued  as 
the  representatives  of  gold,  and  London  being  the  principal 
and  practically  the  only  free  market  for  gold  in  Europe,  is 
naturally  more  exposed  to  demands  for  specie  than  any 
other  monetary  center  in  the  world.  It  is  true  that  for 
more  than  forty  years  '  *  the  Government  has  not  had  oc- 
casion to  sanction  any  suspension  of  the  Peel  Act,"  but 
the  price  which  has  had  to  be  paid  for  this  has  been  an 
extremely  high  one,  and  the  adoption  of  the  arrangements 
of  the  Act  of  1844  cannot  be  recommended  to  any  other 
country. 

That  a  suspension  of  the  Bank  Act  has  not  taken  place 
since  1866  is  due  to  the  general  forethought  and  care  with 
which  the  Directors  of  the  Bank  of  England  have  con- 
ducted their  business  in  times  of  pressure. 


261 


ENGLISH     BANKING    ORGANIZA- 
TIONS. 

By  Ernest  Sykes. 

(a)  the  institute  of  bankers. 

The  Institute  of  Bankers,  founded  in  1879,  is  an  asso- 
ciation of  individuals,  not  of  banks,  as  in  the  case  of  the 
Central  Association  of  Bankers. 

Its  members  consist  of 

1 .  Fellows :  Elected  by  the  council  of  the  institute. 

2.  Associates:  Who  must  have  been  not  less  than 

ten  years  in  the  service  of  a  bank,  or  being  in 
a  bank  are  graduates  of  a  university. 

3 .  Certificated  associates :  Members  who  have  gained 

the  certificate  of  the  institute. 

4.  Ordinary  members:    Who  must  be  on  the  staff 

of  a  bank. 

The  number  of  members  of  all  grades  at  the  present 
time  (January,  1909)  exceeds  7,250. 

The  primary  object  of  the  institute  is  "to  facilitate  the 
consideration  and  discussion  of  matters  of  interest  to  the 
profession,  and,  where  advisable,  to  take  measures  to 
further  the  decisions  arrived  at." 

One  of  the  earliest  efforts  of  the  institute  in  this  direc- 
tion was  the  codification  of  the  laws  of  bills  of  exchange. 
In  1 88 1  the  bills  of  exchange  bill  was  drafted  by  Mr.  (now 
Sir  Mackenzie)  Chalmers  on  the  instructions  of  the  comicil, 


262 


The     English      Banking      System 

introduced  in  Parliament  by  Lord  Avebury  (then  Sir 
John  IvUbbock) ,  and  became  law  as  the  bills  of  exchange 
act  1882.  The  act  has  been  adopted  in  most  British 
colonies  and  to  some  extent  forms  the  basis  of  the  New 
York  negotiable  instruments  law. 

In  1889  the  factors  act  was  similarly  passed,  mainly  on 
the  initiative  of  the  institute. 

Among  other  matters  which  have  been  thoroughly 
ventilated  by  the  council  of  the  institute  may  be  men- 
tioned the  bankruptcy  law  previous  to  the  act  of  1883, 
the  condition  of  the  gold  coinage  previous  to  the  coinage 
acts  of  1889  and  1891,  the  bimetallic  controversy,  and 
the  gold  reserve  question. 

At  the  present  time  the  council,  at  the  invitation  of  the 
Board  of  Trade,  has  under  consideration  the  question  of 
an  international  conference  to  consider  the  possibility  of 
a  greater  unification  of  the  laws  of  bills  of  exchange  in 
different  countries. 

The  institute  has  on  many  occasions  acted  as  the  rep- 
resentative of  banking  interests  in  facilitating  arrange- 
ments with  the  board  of  inland  revenue,  the  post-office, 
and  other  government  departments. 

The  means  by  which  the  consideration  and  discussion 
of  matters  of  interest  are  provided  are  chiefly  by  papers 
read  before  the  members  at  meetings  held  usually  at 
monthly  intervals  during  the  winter  session,  October  to 
May,  and  by  the  Journal  of  the  Institute,  published 
monthly  from  October  to  June,  inclusive. 

The  secondary  object  of  the  institute  is  "to  give 
opportunities  for  the  acquisition  of  a  knowledge  of  the 
theory  of  banking." 


263 


National    Monetary     Commission 

With  this  object  lectures  on  technical  subjects  are 
delivered  in  London  and  the  chief  towns  of  England  and 
Wales,  followed  by  examinations,  as  a  result  of  which 
prizes  are  awarded  to  the  most  successful  candidates. 
Annual  examinations  for  the  certificate  of  the  institute 
are  held,  the  subjects  of  examination  being  economics, 
practical  banking,  commercial  law,  commercial  arith- 
metic, English  composition  and  banking  correspond- 
ence, and  bookkeeping.  In  1908,  3,180  candidates 
were  examined  in  London  and  379  other  centers  through- 
out the  United  Kingdom  and  the  colonies.  Prizes  are 
offered  both  in  connection  with  the  annual  examinations 
and  also  for  the  best  essays  received  on  certain  subjects 
announced  yearly  by  the  council. 

In  nearly  all  the  leading  banks  the  junior  members  of 
the  staff  are  encouraged  to  study  the  theory  of  banking, 
not  only  by  the  offer  of  monetary  grants,  but  also  by  the 
increased  chances  of  promotion  to  more  responsible 
positions  which  ensue  from  success  in  this  direction. 

There  is  a  reference  and  circulating  library  on  banking 
and  kindred  subjects  for  the  use  of  members. 

The  council  invite  questions  dealing  with  the  practical 
working  of  a  bank,  which  are  answ^ered  through  the 
medium  of  the  Journal  of  the  Institute.  These  questions 
with  the  council's  replies  have  been  collected  in  a  volume 
the  sixth  edition  of  which  will  shortly  be  pubHshed.  The 
book  has  been  very  serviceable  not  only  to  individual 
members,  but  also  as  a  means  of  unifying  and  assimilating 
banking  practice  throughout  the  coimtry,  and  of  formu- 


264 


The     English     Banking     System 

lating  and  expressing  the  custom  of  bankers  as  a  part  of 
the  "law  merchant." 

The  government  of  the  institute  is  vested  in  a  president, 
vice-presidents,  treasurer,  and  council,  the  latter  not  to 
exceed  twenty-four  in  number,  and  meetings  are  held 
monthly,  or  oftener  if  necessary.  Elections  for  these 
offices  take  place  at  each  annual  general  meeting,  at  which 
fellows,  associates,  and  certificated  associates  are  alone 
entitled  to  vote. 

The  president  is  now  (January,  1909)  Sir  Felix  Schuster, 
Bart.,  the  governor  of  the  Union  of  London  and  Smiths 
Bank  (Limited).  The  other  officers  are  either  directors, 
partners,  or  high  officials  of  banks,  and  are  all  fellows  of 
the  institute. 

(b)  the  central  association  of  bankers. 

The  Central  Association  of  Bankers  was  formed  in 
February,  1895,  to  unite  the  committees  of  the  London 
Clearing  Bankers,  the  London  West  End  Bankers,  and 
the  English  Country  Bankers. 

It  consists  at  the  present  of  18  members,  representing 
the  London  clearing  banks,  2  members  representing  the 
West  End  banks,  and  10  representatives  of  the  EngHsh 
country  banks. 

The  scope  of  its  work  embraces  all  questions  directly  or 
indirectly  affecting  the  banking  community,  whether 
arising  from  legislative  proposals  or  practical  working. 
The  association  does  not,  however,  attempt  to  intervene 
in  the  internal  management  of  the  individual  banks  rep- 
resented upon  its  committee,  nor  is  it  in  any  sense  a  dis- 
ciplinary body. 

265 


National    Monetary     Commission 

The  association  is  in  close  touch  with  the  parUamentary 
committee  of  bankers  with  the  object  of  defending  and 
maintaining  the  interests  of  bankers  in  ParUament,  but 
it  avoids  any  intervention  in  poHtical  matters  except 
where  the  interests  of  banks  and  bankers,  as  such,  are 
involved. 

Among  the  legislative  measures  in  which  the  associa- 
tion has  recently  interested  itself  are  the  bills  of  exchange 
(crossed  cheques)  act  (1906),  drafted  and  introduced  at 
the  instance  of  the  association;  the  debenture  and  de- 
benture stock  bill  (1907),  drafted  at  the  instance  of  the 
association  and  introduced  in  the  House  of  Lords  by  the 
chairman,  Lord  Avebury.  The  bill  was  afterwards  incor- 
porated in  the  companies  act  (1907),  section  15. 

Other  acts  upon  which  the  influence  of  the  association 
has  been  brought  to  bear  in  various  directions  are  the 
companies  acts  (1900  and  1907),  the  pubHc  trustee  act, 
the  limited  partnership  act,  and  the  prevention  of  cor- 
ruption act. 

Other  questions  which  engaged  the  attention  of  the 
association  have  been  gold  reserves,  irregular  forms  of 
cheques,  municipal  borrowing,  the  custody  of  valuables, 
and  stamp  duties,  more  especially  in  1902,  when  an  extra 
stamp  duty  on  cheques  was  proposed  and  a  deputation 
of  the  association  attended  on  the  Chancellor  of  the 
Exchequer. 

The  association  has  no  regular  times  of  meeting  nor 
any  archives.  Memoranda  are  issued  from  time  to  time 
to  the  members  only,  dealing  with  current  topics,  and  a 
yearly  report. 


266 


THE  LONDON  BANKERS  CLEARING 

HOUSE. 

By  Robert  Martin  Holland, 
Honorable  Secretary  of  the  London  Bankers  Clearing  House. 

The  exact  origin  of  the  London  Bankers  Clearing  House 
will  probably  never  be  determined,  for,  like  other  institu- 
tions whose  purpose  has  been  to  save  time  and  trouble,  its 
system  appears  to  have  been  gradually  evolved. 

The  Goldsmith  Bankers  at  the  end  of  the  seventeenth 
century,  who  combined  the  care  of  their  customers,  money 
with  the  manufacture  of  silver  plate,  apparently  gave  each 
of  their  depositors  a  deposit  note  acknowledging  the  whole 
amount  deposited. 

When  the  customer  wished  to  draw  some  of  his  money, 
this  note  was  returned  and  again  issued  to  the  customer 
with  an  indorsement  noting  the  amount  drawn  and  the 
balance  left;  or  if  desired,  a  depositor  could  transfer  the 
whole  by  indorsement. 

The  next  improvement  in  method  was  for  the  depositor 
to  take  several  receipts  of  convenient  amounts  instead  of 
only  one;  and  this  was  shortly  followed  by  each  banker 
issuing  his  own  notes  payable  on  demand. 

The  first  printed  bank  notes  were  probably  those  of 
Messrs.  Child  &  Co.,  which  were  issued  in  1729. 

They  bore  a  vignette  of  Temple  Bar  in  the  left-hand 
corner  and  were  worded  much  in  the  same  manner  as  the 
notes  of  the  Bank  of  England  are  to-day. 


267 


National    Monetary     Commission 

A  few  years  later,  in  order  to  suit  their  customers'  con- 
venience some  of  the  bankers  began  to  issue  printed 
checks  to  be  filled  in  by  the  customer  himself.  The  name 
of  the  drawee,  the  amount  that  they  were  drawn  for,  and 
the  drawer's  signature  being  all  that  was  necessary  to 
render  them  valid  instruments.  Such  checks  for  the  year 
1762  are  in  the  possession  of  Messrs.  Child. 

With  the  growth  of  the  check  system,  each  banker  would 
daily  find  himself  in  possession  of  a  number  of  drafts  for 
the  credit  of  his  customers  that  needed  collection  at  the 
offices  of  other  bankers.  This  would  necessitate  each 
bank  sending  out  one  or  more  clerks  on  what  became 
known  as  "walks "  to  obtain  cash  or  notes  for  these  drafts 
from  the  houses  on  which  they  were  drawn. 

As  in  London  alone  there  were  some  fifty  or  more  private 
firms  carrying  on  a  banking  business  this  necessitated  a 
considerable  amount  of  work  and  was  attended  with  grave 
risk  of  robbery. 

It  is  probable,  therefore,  that  arrangements  were  made 
by  some  of  the  bankers,  as  it  is  still  done  in  some  country 
towns,  to  meet  at  one  bank  one  week  and  at  another  the 
next  for  the  purpose  of  exchanging  checks. 

But  in  consequence  of  the  number  of  the  London  bankers 
this  method  would  prove  awkward,  and  about  the  year 
1770  we  find  that  the  walk  clerks  from  the  city  and  West 
End  banks  had  made  a  practice  of  meeting  at  lunch  time 
at  a  public  house  called  the  Five  Bells  in  Dove  court,  Lom- 
bard street,  close  to  St.  Mary  Woolnoth  Church,  and  not  so 
very  far  from  the  site  of  the  Bankers  Clearing  House  of 
to-day.     Here  in  the  public  room,  or  according  to  tradition 


268 


The     English      Banking     S  y  stem 

on  the  posts  in  the  court  outside,  each  day  after  lunch  a 
rough  system  of  exchange  of  checks  was  carried  on  between 
the  clerks  from  each  bank,  the  balances  being  settled  in 
notes  and  cash.  This  rough  system  of  clearing  grew  to 
such  an  extent  that  the  bankers  became  alarmed  at  the 
large  amount  of  notes  involved  and  rented  a  room  for  their 
clerks  to  meet  and  exchange  drafts. 

The  first  reference  to  this  room,  which  is  believed  to 
have  been  a  private  room  at  the  Five  Bells,  is  found  in  the 
books  of  Martins  Bank,  where  "Quarterly  charge  for  use 
of  clearing  room,  19s.  6d.,"  is  a  charge  in  1773.  A  Httle 
later  this  room  was  found  too  small  and  a  larger  room 
was  taken  at  Mrs.  Irving 's,  a  private  house  next  door  to 
the  Five  Bells. 

About  this  time,  according  to  a  clearing  book  dated  1777 
in  the  possession  of  Messrs.  Smith,  Payne  &  Smith's 
successors,  "The  Union  of  London  and  Smith's  Bank" 
there  seem  to  have  been  33  banks  in  the  Clearing  House. 

This  book  contains  Smith,  Payne  &  Smith's  clearing  for 
several  days  in  March,  1777,  and  the  daily  clearing  would 
seem  to  have  amounted  to  about  £105,000,  the  amounts 
due  to  the  various  bankers  varying  from  £4  to  £8,680. 

The  settlement  seems  to  have  been  very  complicated; 
an  exchange  of  checks  was  made  between  bank  and  bank 
as  far  as  possible,  then  further  amounts  were  settled  by 
the  handing  over  of  surplus  checks  on  other  banks  in 
satisfaction  of  another  bank's  deficiency,  and  finally  the 
ultimate  settlement  was  made  in  notes  and  gold. 

Mrs.  Irving 's  room  in  turn  proved  too  small — there  were 
43   banks   in   the   Clearing   House   in    1800 — despite   the 


269 


National    Monetary     Commission 

bankers  having  had  the  first  floor  taken  out  and,  in  order 
to  give  more  light,  a  lamp  hung  from  the  ceiling,  "  it  being 
a  dismal,  dark  room." 

So  in  or  about  1805,  at  the  instigation  of  Mr.  Snaith,  of 
the  firm  of  Sikes,  Snaith  &  Snaith,  who  failed  in  the  panic 
of  1825,  Mrs.  Irving  was  pensioned  off,  and  a  ground-floor 
room  taken  in  premises  belonging  to  Messrs.  Smith,  Payne 
&  Smith,  which  adjoined  their  bank  in  Lombard  street. 

Two  inspectors  were  appointed,  Mr.  William  Thomas 
and  Mr.  White,  the  wine  merchant  of  Lime  street,  for  at 
that  time  and  for  many  years  to  come  the  inspectors  car- 
ried on  businesses  of  their  own. 

The  next  authentic  account  of  the  Clearing  House  is 
contained  in  the  "report  of  the  committee  on  the  high  price 
of  gold  bullion,  1810,"  when  Mr.  William  Thomas,  the 
inspector  of  the  Clearing  House,  and  Mr.  Richardson,  a 
bill  broker,  were  among  the  witnesses  examined. 

Mr.  Thomas  gave  the  number  of  clearing  bankers  at  this 
time  as  46,  while  Mr.  Richardson  stated  that  they  were  45 
and  remarked  that  they  had  only  increased  by  3  in  the 
last  ten  years. 

In  reply  to  a  question  as  to  the  amount  of  the  drafts 
brought  into  the  house  daily,  with  the  exception  of 
those  on  settling  days  and  India  prompts,  Mr.  Thomas 
stated  that  they  amounted  to  about  £4,700,000,  each 
individual  banker  making  a  mutual  exchange  of  drafts 
with  his  neighbor,  the  difference  being  paid  up  in  bank 
notes. 

About  £220,000  in  bank  notes  was  apparently  required 
daily,  but  on  stock  exchange  settling  days  the  amount 


270 


The      English      Banking     System 

required  was  much  greater,  for  the  whole  amount  paid  on 
these  days  sometimes  reached  £14,000,000. 

Mr.  Thomas  further  stated  that  the  business  at  the 
Clearing  House  had  considerably  increased  of  late  years, 
and  that  the  system  had  been  in  existence  for  some  thirty- 
five  years. 

Great  improvements  had,  he  said,  been  made  in  the  last 
fourteen  months,  but  these  improvements  had  not  altered 
the  amount  of  bank  notes  that  passed. 

From  Mr.  Richardson's  evidence  we  learn  that  there 
had  in  the  last  four  or  five  years  been  an  alteration  in  the 
hour  at  which  the  Bank  of  England  took  from  the  bankers 
the  sum  daily  due  to  them  ' '  on  the  ground  of  bank 
charge."  The  hour  had  formerly  been  "as  soon  after  9 
as  they  could  agree  upon  the  sum,"  whereas  now  it  was 
at  4  o'clock. 

The  result  of  this  alteration  was  a  very  great  saving  in 
the  use  of  notes,  for  the  banker  was  able  to  pay  the  bank 
charge  by  the  medium  of  drafts  upon  the  bank  which  had 
been  paid  in  to  him  during  the  day  by  his  customers  for 
bills  discounted  by  them  at  the  Bank  of  England  that 
same  day.  From  this  we  ascertain  that  it  was  not  the 
practice  for  each  banker  to  have,  as  now,  an  account  with 
the  Bank  of  England,  nor  did  the  Bank  of  England  then 
or  for  many  years  later  have  anything  to  do  with  the 
Clearing  House. 

We  further  learn  from  Mr.  Richardson  that  the  West 
End  bankers  had  not  any  system  of  clearing  with  the  city 
bankers,  but  brought,  as  they  did  for  many  years  to  come, 
their  demands  mutually  upon  each  other,  which  were 
alwa3^s  discharged  on  both  sides  mutually  by  bank  notes. 

76651 — 10 18  271 


National    Monetary     Commission 

That  the  work  did  not  always  go  quite  smoothly  at  the 
Clearing  House  at  this  time  is  evident  from  an  account 
we  have  of  Mr.  Barnett,  the  chairman  of  the  bankers' 
committee,  going  into  the  Clearing  House  at  midnight 
and  ordering  the  bell  to  be  rung  to  silence  the  clerks. 
Such  protracted  sittings  are  absolutely  unknown  in  our 
time. 

After  this  the  arrangements  were  modified,  and  all 
checks  were  allowed  to  be  delivered  at  the  House  up  to  4 
o'clock,  though  the  bankers  might  continue  to  pay  over 
the  counter  up  to  5  o'clock. 

One-pound  notes  were  withdrawn  from  the  Clearing 
House  at  this  time. 

Mr.  White  left  the  Clearing  House  in  18 13,  being  suc- 
ceeded by  Mr.  Lawson,  and  Mr.  Thomas  left  in  1821. 

In  1 82 1,  at  a  meeting  of  bankers  held  at  the  City  of 
London  Tavern  in  Bishopsgate  street  on  February  14, 
Mr.  John  Smith  being  in  the  chair,  it  was  resolved  "  That 
great  advantage  would  arise  to  the  bankers  of  London 
from  the  appointment  of  a  permanent  committee  chosen 
out  of  their  own  body  for  the  purpose  of  suggesting  or 
carrying  into  effect  any  rules  or  regulations  tending  to 
increase  the  facility  or  security  of  their  mutual  transac- 
tions," and,  after  passing  a  vote  of  thanks  to  the  gentlemen 
who  constituted  the  temporary  committee  for  regulating 
the  Clearing  House,  13  members  were  elected,  2  of  whom 
apparently  represented  the  West  End  bankers. 

On  February  28  this  committee  met  at  the  Clearing 
House,  and  Mr.  John  Smith  was  appointed  chairman  and 
Mr.  John  Martin  deputy  chairman. 


272 


The     English     Banking     System 

The  affairs  of  the  Clearing  House  were  closely  gone  into. 
It  seems  to  have  been  carried  on  in  a  very  haphazard 
manner,  for  the  inspector,  Mr.  Thomas,  had  to  confess  that 
"very  few  of  the  regulations  intended  to  have  been 
adopted  for  the  management  of  the  Clearing  House  were 
strictly  complied  with.  " 

After  several  meetings  the  following  regulations  were 
agreed  to: 

1 .  That  each  banking  house  be  requested  to  send  to  the 
inspector  upon  a  slip  of  paper  as  soon  after  5  o'clock  as 
possible  the  amount  of  their  balance  with  the  Clearing 
House  according  to  their  own  books. 

2.  That  such  part  of  the  eighth  regulation  (as  agreed 
to  in  1809)  which  directs  that  no  payments  be  made  until 
the  general  balance  is  correct  be  suspended,  and  that  in 
future  each  clerk  report  himself  to  the  inspector  as  soon 
as  he  is  prepared  to  pay  or  to  receive,  and  if  the  balance 
upon  his  sheet  be  found  to  agree  or  nearly  so  with  the 
statement  furnished  by  the  banking  house,  the  inspector 
will  then  direct  the  creditor  who  is  first  ready  to  receive 
the  balance  to  be  paid  by  the  debtor  or  debtors  first  pre- 
pared to  pay,  and  such  party  so  continuing  to  settle  in 
regular  succession  as  they  may  report  themselves  to  the 
inspector,  but  no  creditor  to  receive  more  than  the  amount 
of  his  balance. 

3.  In  order  to  prevent  the  inconvenience  which  might 
arise  from  the  introduction  of  small  notes  or  money  into 
the  Clearing  House  for  the  settlement  of  balances,  it  was 
resolved  that  each  clerk  be  allowed  to  give  a  memorandum 
for  any  fractional  amount  due  from  him  under  £10,  such 


273 


National    Monetary     Commission 

memorandum,  however,  to  be  received  the  fohowing  day 
at  the  banking  house  owing  the  money,  but  on  no  account 
to  be  reproduced  at  the  Clearing  House. 

Shortly  after  the  passing  of  these  rules  Mr.  Thomas's 
resignation  was  accepted,  and  he  was  succeeded  by  Mr. 
Hennah,  of  the  firm  of  Hennah  &  Lawes,  bill  brokers. 

The  next  records  of  the  Clearing  House  are  those  of  a 
meeting  on  June  12,  1827,  when  the  inspector  was  in- 
structed to  communicate  to  the  clerks  at  the  Clearing 
House  that  no  memorandum  given  for  the  settlement  of 
balances  is  for  the  future  to  be  presented  at  the  Clearing 
House  for  payment,  but  is  to  be  sent  the  following  morning 
to  the  different  banking  houses  owing  the  money.  Such 
memorandums  in  no  case  to  exceed  £50,  and  that  no 
banking  house  will  be  considered  liable  for  any  memoran- 
dum if  not  presented  to  them  the  following  morning,  nor 
for  any  balances,  however  small,  for  which  a  memorandum 
is  not  given. 

It  was  also  resolved  that  it  be  recommended  to  each 
banking  house  to  require  the  production  of  the  signed 
ticket,  upon  which  authority  the  clearing  clerk  has  paid 
away  any  money. 

On  February  20,  1832,  the  committee  of  bankers  con- 
stituted in  1 82 1  held  their  second  meeting,  when  the  sub- 
committee reported  that — 

' '  The  Clearing  House  had  occupied  much  of  the  com- 
mittee's time,  from  the  complex  manner  in  which  the 
accounts  were  formerly  kept,  and  from  the  difficulties 
presented  by  old  prejudices  against  altering  the  improper 
mode  of  paying  balances,  by  which  a  clerk  entitled  to 


274 


The     English      Banking     System 

receive  only  a  small  balance  was  frequently  made  the  dis- 
tributer of  very  large  sums. 

"  The  committee  believe  that  on  examination  the  present 
system  will  be  found  to  be  regulated  upon  such  clear  prin- 
ciples that  nothing  is  wanted  to  insure  regularity  in  that 
important  department,  but  a  determination  on  the  part 
of  each  banking  house  to  enforce  obedience  on  the  part  of 
their  clerks  to  the  instructions  of  the  inspectors." 

In  1833  Sir  John  Key  built  a  new  Clearing  House  upon 
part  of  the  ground  where  the  old  general  post-office  stood ; 
that  is,  upon  the  present  site  of  the  Clearing  House,  and 
subsequently,  in  1834,  sold  it  to  the  clearing  bankers  for 
£7,000,  twenty  out  of  39  clearing  bankers  paying  £350 
each  toward  the  purchase.  From  the  date  of  this  pur- 
chase up  to  1900  the  ownership  of  the  building  of  the 
Clearing  House  was  in  the  hands  of  a  few  of  the  clearing 
bankers  and  not  of  all.  This  arose  from  the  tontine  pur- 
chase system  instituted  by  the  20  bankers  above,  by  which 
any  share  belonging  to  the  original  holders  which  came 
into  the  market  by  death  or  amalgamation  had  by  the 
agreement  to  be  bought  by  one  of  the  survivors,  with  the 
result  that  in  1900  nine  individuals,  representing  three 
banks  and  one  recently  defunct  clearing  bank,  owned  the 
Clearing  House.  But  we  will  revert  to  the  ownership  of 
the  Clearing  House  later. 

In  1834  the  first  of  the  joint  stock  banks,  the  London 
and  Westminster  Bank,  was  estabUshed,  and  on  February 
24  at  a  meeting  of  the  committee  of  clearing  bankers  a 
letter  was  read  from  Mr.  J.  W.  Gilbart,  the  manager  of  the 
London  and  Westminster  Bank,  requesting  permission  on 


27s 


National    M  o  n  e  t  ar  y     Commission 

the  part  of  the  directors  ' '  to  send  a  clerk  to  the  Clearing 
House  in  the  ordinary  way. "  It  was  unanimously 
resolved  that  this  request  be  not  complied  with,  and  a  reply 
was  sent,  to  the  following  effect : 

"  To  J.  W.  GiLBART,  Esq. 

" Sir:  I  have  laid  before  the  committee  of  bankers  your 
letter  of  the  1 8th  instant  requesting  permission  on  the  part 
of  the  directors  of  the  London  and  Westminster  Bank  to 
send  a  clerk  to  the  Clearing  House  in  the  ordinary  way, 
and  in  reply  I  am  desired  to  acquaint  you  that  the  com- 
mittee decline  complying  with  such  request  under  the  con- 
sideration that  the  Clearing  House  is  intended  exclusively 
for  the  accommodation  of  private  bankers.  " 

In  1839  there  were  29  banks  in  the  Clearing  House,  the 
total  of  the  clearing  for  the  year  being  £954,401 ,600,  to  set- 
tle which  bank  notes  aggregating  £66,275,000  or  6.9  per 
cent  were  required. 

From  1824  to  1834  there  are  no  records  available,  but  it 
is  known  that  the  joint-stock  banks  were  constantly  apply- 
ing for  admission  and  as  constantly  snubbed  and  refused. 

In  1 84 1  Mr.  Hannah  resigned  the  inspectorship,  and  Mr. 
John  Pocock,  from  Messrs.  Stevenson  Salt  &  Co.,  was  ap- 
pointed in  his  place.  Shortly  after  his  appointment  he 
made  great  alterations  in  the  method  of  transfer.  The 
clerks  had  previously  been  allowed  to  draw  for  their  money 
separately,  so  that  ten  or  fifteen  transfers  would  be  put  into 
the  inspector's  box  for  one  clearer  instead  of  one  transfer 
for  the  whole  payment  by  the  payee,  as  was  arranged  by 
Mr.  Pocock.     He  also  did  away  with  the  candles,  50  of 


276 


The     English      Banking     S  y  s  t  em 

which  were  used  each  night,  and  introduced  gas  in  their 
place,  thus  creating  a  great  saving. 

On  January  31,  1853,  Mr.  Derbishire  was  appointed 
assistant  inspector. 

In  1854  the  Clearing  House  was  enlarged  and  prepara- 
tions were  made  for  the  admission  of  the  joint-stock  banks, 
who  had  long  threatened  to  make  a  clearing  house  of  their 
own. 

On  May  4  the  committee  of  clearing  bankers  met  the 
deputy  governor  of  the  Bank  of  England  at  the  bank,  and 
after  much  discussion  the  following  plan  was  agreed  upon 
to  come  into  force  on  Thursday,  May  11. 

1.  That  the  bank  shall  appoint  a  clerk  to  attend  after 
the  usual  hours  for  the  purposes  of  the  clearing. 

2.  That  his  business  shall  be  to  receive  orders  signed  by 
the  banker  empowering  the  bank  to  debit  the  accounts  of 
the  said  bankers  and  credit  the  clearing  account. 

3.  That  he  shall  also  sign  vouchers  presented  by  other 
bankers  who  have  claims  on  the  clearing,  as  certified  by 
the  clearing-house  inspector,  so  long  as  there  shall  be  a 
sufficient  balance  upon  the  clearing  account;  but  that  if 
there  be  not  money  enough  for  the  last  claimant  the 
voucher  shall  be  given  for  the  balance  and  the  deficiency 
stated  thereon.  If  there  be  more  money  than  claimed 
the  balance  shall  remain  over  for  the  next  day. 

4.  That  should  it  happen  that  the  banker  has  not  suffi- 
cient money  on  his  account  to  meet  his  own  transfer  draft 
he  may  be  allowed  to  pay  in  bank  notes  to  meet  the 
deficiency  till  4.30  o'clock,  but  he  may  not  draw  for  notes 
after  4  o'clock. 


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National    Monetary     Commission 

In  consequence  of  the  opening  of  this  clearing  account 
at  the  Bank  of  England,  the  use  of  bank  notes  in  the  Clear- 
ing House  was  entirely  done  away  with — a  great  step  in 
advance,  for  instead  of  numerous  individual  transactions 
concluded  between  bank  and  bank,  each  bank  when  it  had 
agreed  the  totals  with  every  other  bank,  either  paid  unto 
the  clearing  account  a  transfer  draft  for  the  total  amount 
it  was  out  on  the  day's  clearing,  or  received  from  that 
account  a  transfer  draft  for  the  amount  due  to  it  as  the 
result  of  the  day's  clearing. 

In  May,  1854,  the  Clearing  House  was  closed  for  altera- 
tions and  enlargement,  and  the  business  was  temporarily 
carried  on  at  the  Hall  of  Commerce.  Here,  on  June  6, 
1854,  applications  for  admission  to  the  Clearing  House 
were  received  from  the  following  joint-stock  banks:  The 
London  and  -Westminster,  the  London  Joint  Stock,  the 
Union  Bank  of  London,  the  Commercial  Bank  of  London, 
and  the  London  and  County  Bank;  and  it  was  resolved 
"that  the  secretary  be  authorized  to  comply  with  such 
applications,  subject  to  the  payment  of  an  annual  sum  to 
be  fixed  by  the  committee  to  reimburse  them  for  the  out- 
lay that  has  been  found  necessary  to  afford  accommoda- 
tion for  their  admission."  There  were  at  this  time 
25  private  banks  in  the  Clearing  House. 

Following  on  the  admission  of  the  5  premier  joint- 
stock  banks  in  1854  there  were  frequent  applications  from 
other  joint-stock  banks — many  from  the  moment  of  their 
foundation.  But  the  wise  reply  of  the  committee  was 
invariably  that  they  did  not  "deem  it  expedient  to  take 
into  consideration  such  applications  from  any  banking 


278 


The     English     Banking     S  y  stem 

establishment  that  has  not  been  in  operation  at  least  for  a 
period  of  twelve  months."  On  some  sHght  alterations 
being  made  in  the  rules  in  1856  the  inspectors  appealed  to 
the  committee  for  support  to  quell  disturbance,  "as 
many  of  the  clerks  have  been  persuaded  that  only  two  or 
three  of  the  bankers  are  anxious  to  impose  a  new  system." 

The  inspectors  stated  that  the  Clearing  House  was 
"overhanded,"  and  recommended  a  shortening  of  the 
hours  as  the  best  remedy.  "The  hour  of  11,"  they  said, 
"  would  be  sufficiently  early  in  the  morning,  and,  excepting 
on  certain  days,  a  quarter  to  3  in  the  afternoon." 

They  named  certain  clerks  as  ringleaders  in  the  dis- 
turbance (tradition  says  that  they  introduced  a  donkey 
into  the  Clearing  House  one  day),  and  said  that  if  one 
gentleman  had  been  enabled  to  carry  out  his  intention  he 
would  have  prevented  the  inspectors  from  even  stepping 
into  the  clearing  room.  The  old  clearers  were  evidently 
the  originators  of  the  disturbance,  for  they  are  reported 
to  find  "  the  present  state  of  the  house  one  of  intense  quiet 
in  comparison  to  what  they  have  known  it,"  "so  that  any 
attempt  of  mine,"  adds  the  inspector,  "  to  encourage  read- 
ing among  those  less  occupied  has  been  exposed  to 
ridicule."  The  committee  intervened  as  requested,  and 
all  disturbance  ceased,  but  they  insisted  that  for  the 
future  the  inspectors  should  give  their  entire  attention  to 
the  Clearing  House,  to  the  exclusion  of  any  private  busi- 
ness that  they  had  previously  carried  on. 

Though  the  joint-stock  banks  had  been  admitted  to 
the  Clearing  House  yet  they  were  only  allowed  to  rent 
seats  there  and  had  no  share  in  the  management,  so  for 


279 


National    Monetary     Commission 

the  support  of  their  mutual  interests  they  had  a  com- 
mittee of  their  own  which  settled  the  rate  to  be  given  by 
the  joint-stock  banks  in  the  London  district  for  deposit 
money  at  seven  days'  notice. 

In  1858  the  country  bankers  submitted  a  plan  for  estab- 
lishing a  country  bankers'  clearing  house  in  London  and 
proposed  that  the  clearing  house  committee  should 
appoint  two  or  three  of  their  number  to  unite  with  them 
as  a  working  committee. 

The 'establishment  of  a  separate  country  bankers'  clear- 
ing house  would  have  led  to  many  inconveniences,  and 
Mr.  John  Lubbock,  now  Lord  Avebury,  submitted  a  plan 
for  carrying  out  a  separate  country  clearing  at  the  Clear- 
ing House.  The  committee  approved  the  plan  and  sub- 
mitted it  to  the  country  bankers'  committee,  who  also 
gave  their  approval. 

On  Monday,  November  15,  1858,  the  clearing  house 
committee  reported  the  result  of  their  conference  with 
the  country  bankers  and  resolved  that  "  Each  house  sends 
a  clerk  to  the  Clearing  House  on  Monday,  2 2d  instant,  at 
12  o'clock  to  clear  the  country  checks."  At  the  same 
time  they  instructed  their  secretary  to  write  to  Mr. 
Gillett,  the  secretary  of  the  country  bankers'  committee, 
and  inform  him  that  "  the  London  bankers  finding  that  a 
large  number  of  their  country  friends  are  anxious  that 
they  should  establish  a  clearing  for  country  checks  have 
agreed  upon  a  plan  for  that  purpose." 

Thus  was  instituted  the  country  clearing,  which  more 
than  all  else  has  brought  about  the  almost  universal  use 
of  checks  in  England,  to  the  exclusion  of  notes  and  coin. 


280 


The     English      Banking     System 

Mr.  Lubbock's  scheme  was  so  well  thought  out  that 
from  its  initiation  to  the  present  time  the  rules  have  had 
to  be  only  very  slightly  modified. 

The  balances  kept  by  the  clearing  bankers  with  the 
Bank  of  England  have  increased  so  much  in  recent  years 
that  any  necessity  for  some  arrangement  between  the 
clearing  banks  and  the  Bank  of  England  as  to  over- 
drafts being  permissible  has  ceased  to  exist,  but  in  i860 
we  find  the  following  correspondence  taking  place  be- 
tween Mr.  Bevan,  the  chairman  of  the  committee  of 
clearing  banks,  and  the  Bank  of  England:  "Referring 
to  our  recent  communications  on  the  subject  of  the  settle- 
ment of  the  bankers'  clearing,  I  beg  to  say,  to  prevent 
mistake,  that  I  understand  that  the  cashiers  of  the  Bank 
of  England  will  have  the  authority  of  the  court  in  case  of 
any  banker's  account  appearing  overdrawn  in  the  clear- 
ing to  overpay  the  same,  to  an  extent  previously  agreed 
upon,  on  the  deposit  of  any  of  the  undermentioned  securi- 
ties, viz,  exchequer  bills,  India  bonds  or  debentures, 
Turkish  guaranteed  4  per  cent  stock,  and  commercial 
bills.  The  advance  to  be  repaid  by  such  bankers  in  the 
course  of  the  next  day." 

To  this  the  governor  replied:  "You  have  rightly 
interpreted  what  passed  at  our  interview  yesterday,  and 
I  and  my  deputy  will  be  prepared  to  issue  our  instructions 
to  the  chief  cashiers  to  act  in  the  sense  mentioned." 

In  1864  the  Bank  of  England  entered  the  Clearing  House 
to  clear  on  one  side  only,  the  outside,  for  though  the  Bank 
presents  to  the  clearing  bankers  at  the  Clearing  House 
all  checks  payable  by  them,  all   checks   and  bills  drawn 


281 


National    Monetary     Commission 

on  the  Bank  are  presented  by  the  clearing  bankers  at  the 
Bank  itself,  and  the  proceeds  placed  to  the  credit  of  each 
bank's  account.  At  the  same  time  the  governor  of  the 
Bank  of  England  was  made  ex  officio  a  member  of  the 
committee  of  clearing  bankers.  After  1864  few  changes 
were  made  in  the  working  of  the  Clearing  House,  the 
volume  of  the  country  and  town  clearings  increased 
greatly,  but  the  house  proved  capable  of  meeting  any 
increase. 

The  friction  between  the  old  private  bankers  and  the 
joint-stock  banks  grew  less  as  amalgamations  and  absorp- 
tions increased,  and  before  many  years  the  committee  of 
London  clearing  bankers  and  joint-stock  banks  commit- 
tee amalgamated,  it  being  agreed,  as  a  condition  of  the 
joint-stock  banks  committee  ceasing  to  exist,  that  all  the 
banks  would  abide  by  the  ruling  of  the  committee  as  to 
the  rate  of  deposit  at  seven  days'  notice.  Henceforth, 
every  bank  in  the  Clearing  House  was  entitled  to  have 
one  representative  on  the  committee.  Such  representa- 
tives have  hitherto  been  chosen  solely  from  the  board 
or  the  partners  and  are  nominated  by  their  banks  and 
formally  elected  by  the  committee.  The  committee  elects 
its  own  chairman,  vice-chairman,  and  honorary  secretary. 
This  committee  meets  regularly  on  the  first  Thursday  in 
each  month,  Thursday  being  the  day  on  which  the  Bank 
of  England  in  normal  times  makes  any  alteration  in  the 
bank  rate  of  discount,  but  it  may  be  summoned  by  requi- 
sition at  any  time  and  meets  automatically  should  the 
bank  rate  be  altered,  since  this  governs  the  rate  of  deposit 
allowed  by  the  bankers. 


282 


The     English     Banking     System 

The  committee  has  full  power  over  all  Clearing  House 
matters,  and  from  the  importance  of  the  banks  who  com- 
pose the  Clearing  House  its  opinion  carries  very  great 
weight  on  all  matters  in  the  banking  world.  It  is,  how- 
ever, controlled  only  by  the  mutual  agreement  of  its 
members;  and  the  decision  of  the  majority  of  its  members, 
though  followed  loyally,  is  never  used  with  any  ultimate 
power  of  compulsion  in  matters  affecting  banking  in  gen- 
eral. It  is  further  weakened  by  the  existence  of  a  certain 
amount  of  rivalry  and  trade  jealousy  between  the  bankers 
and  the  Bank  of  England,  the  bankers  complaining 
that  the  Bank  of  England  is  apt  to  use  the  huge  balances 
kept  by  the  clearing  bankers,  which  are  out  of  all  propor- 
tion to  the  amounts  required  by  the  necessities  of  the 
clearing,  to  compete  unfairly  with  the  bankers.  There  is 
doubtless  some  justice  in  this  complaint,  but  the  strained 
relations  are  due  in  great  measure  to  the  traditional 
rivalry  between  the  Bank  of  England  and  the  bankers, 
and  much  good  might  ensue  in  critical  times  if  the  gov- 
ernor of  the  Bank  of  England  or  even  some  member  of 
the  court  nominated  by  him  were  to  commence  in  normal 
times  to  attend  the  monthly  meetings  of  the  committee 
of  the  clearing  bankers,  of  which  the  governor,  as  has  been 
said,  is  a  member  ex  officio,  though  he  has  never  attended 
any  meeting  other  than  a  complimentary  one  to  an  out- 
going secretary. 

In  1907  a  third  clearing,  the  Metropolitan,  was  estab- 
lished. Hitherto,  with  the  exception  of  one  or  two  city 
offices  which  were  included  in  the  town  clearing,  the 
collection  of  drafts  on  London  branches  of  the  clearing 


283 


National    Monetary     Commission 

banks  had  been  effected  by  the  post  and  by  the  sending  out 
of  walk  clerks  by  each  bank;  but  in  1907  it  was  deter- 
mined to  do  away  with  such  means  of  collection  as  far  as 
possible  and  to  collect  the  branch  checks  through  the 
Clearing  House.  This  proved  so  successful  that  the  West 
End  banks  were  approached  the  following  year,  and  with 
one  exception  readily  consented  to  come  into  the  new 
plan  by  which  their  clearing  agents  had  delivered  to  them 
at  the  Metropolitan  clearing  all  checks  drawn  upon  them. 
This  clearing  is  the  first  clearing  made  each  morning  and 
is  handled  so .  expeditiously  that  even  the  most  distant 
London  branches  get  their  checks  almost  earlier  than 
under  the  old  system.  They  have,  therefore,  plenty  of 
time  to  go  through  them  and  to  make  returns  of  any 
checks  that  can  not  be  paid  in  time  for  such  return  checks 
to  reach  the  Clearing  House  early  in  the  afternoon. 
There  are  now  over  330  banks  and  branches  using  this 
clearing.  The  system  has  worked  so  well  that  it  is 
hoped  that  the  government  pay  offices  will  allow  its  being 
adopted  with  their  pay  warrants  which  have  still  to  be 
presented  by  hand. 

For  the  better  defining  of  the  three  clearing  areas — 
town,  metropolitan,  and  country — the  letters  T  M  C  have 
been  placed  in  the  corner  of  all  Bank  checks.  From 
February  19,  1907,  the  date  of  the  initiation  of  the  Metro- 
politan Clearing,  up  to  December  31  of  that  year  £482,- 
227,000  was  paid  in  this  clearing,  while  for  the  year  1908 
the  total  was  £647,842,000,  as  compared  with  the  town 
clearing  total  for  that  year  of  £10,408,254,000  and  the 
country  total  of  £1,064,266,000,  making  in  all  a  grand 


284 


The     English     Banking     S  y  stem 

total  of  £12,120,362,000,  which  figures,  vast  as  they  are, 
were  a  decrease  of  £610,031,000  on  the  total  £12,730,- 
393,000  for  the  previous  year  1907.  The  work  entailed 
by  such  vast  figures  as  these  could  scarcely  have  been 
dealt  with  by  hand  alone,  but  by  the  installation  of  adding 
machines  the  work  is  easily  and  quickly  done. 

Statistics  are  appended  showing  the  working  of  the 
Bankers  Clearing  House  from  1868  to  1906  and  the  pro- 
portion of  amount  in  each  year  as  compared  with  1868,  the 
first  year  in  which  proper  records  were  kept.  It  must  not 
be  thought  that  all  checks  on  London  are  presented 
through  the  Clearing  House,  for  checks  on  the  London 
branches  of  the  Scotch  banks  and  of  the  colonial  and 
foreign  banks  are  still  presented  over  the  counter. 

Moreover,  though  it  is  mutually  understood  between  the 
clearing  banks  that  checks  on  each  other  will  only  be  pre- 
sented through  the  Clearing  House  this  agreement  has  no 
legal  binding. 

Two  exceptions  are  continually  made;  documents  or 
goods  have  to  be  taken  up  against  cash,  and  the  owner 
before  parting  wishes  to  be  certain  of  his  money.  In  this 
case  the  presenting  banker  either  presents  his  check  for 
marking— that  is  to  say,  the  paying  banker  having  ascer- 
tained from  his  customer's  account  that  there  is  sufficient 
money  thereon  marks  the  check  for  payment,  which  has 
the  same  effect  as  if  the  banker  had  accepted  it;  or,  as  is 
becoming  more  usual,  the  paying  banker  gives  one  of  his 
own  drafts  on  the  Bank  of  England  in  exchange  for  the 
check. 

Besides  the  London  Clearing  House  there  are  eight  pro- 
vincial clearing  houses  in  England — Birmingham,  Bristol, 


285 


National    Monetary     Commission 

Leeds,  Leicester,  Liverpool,  Manchester,  Newcastle,  and 
Sheffield. 

Two  only  of  these  clear  over  £100,000,000  in  the  year. 
Manchester  cleared  £320,296,332  in  1907,  with  an  average 
weekly  total  of  £6,159,545  and  an  average  daily  total  of 
£1,039,923,  and  Liverpool  £196,325,829.  The  others 
cleared  in  the  same  year  from  £12,000,000  to  £61,000,000. 
Small  figures,  indeed,  compared  with  London,  where  the 
highest  total  paid  on  an}^  one  day  was,  in  1907,  £106,- 
703,000.  In  1908  the  highest  total  paid  in  one  day  in  the 
London  clearing  was  £85,833,000  and  the  lowest  £24,- 
903,000. 

The  highest  weekly  total  was  £302,520,000,  the  smallest 
for  a  complete  week  £176,902,000.  The  highest  monthly 
total  was  £1,120,786,000,  the  lowest  £907,176,000. 

The  turnover  is  always  large  on  the  fourth  of  each 
month — since  many  trade  bills  mature  at  that  date — on 
consol  settling  days,  and  on  stock-exchange  settling  days, 
but  fluctuations  are  easily  caused  by  other  incidents, 
such  as  new  issues,  so  that  comparison  for  statistical 
purposes  is  dangerous  without  careful  investigation. 

It  will  be  seen  that  from  1901  to  1906  a  considerable 
increase  was  shown  each  year.  Nineteen  hundred  and 
seven  was  almost  stationary  and  in  1908  the  total  receded, 
as  was  only  natural  from  the  general  trade  and  stock- 
exchange  depression.  The  totals  for  1909  are,  however, 
likely  to  again  produce  a  record. 

The  provincial  clearing-house  returns  similarly  give 
some  indication  of  the  trade  round  those  centers,  but 
there,  as  in  London,  the  object  of  the  Clearing  House  is 


286 


The     English      Banking     System 

primarily  the  convenience  of  exchange  of  checks,  not  the 
regulation  of  banking,  and  little  is  regulated  save,  per- 
haps, the  rate  of  interest  to  be  paid  on  deposits  at  seven 
days'  notice. 

In  these  days,  too,  when  the  tendency  is  strong  for 
amalgamation,  the  local  banks  are  dwarfed  by  their  gigan- 
tic competitors,  with  their  branches  in  many  counties  and 
head  offices  in  London,  with  the  result  that  London  each 
year  controls  more  of  the  banking  in  England  and  the 
provincial  clearings  cease  more  to  be  under  local  control, 
but  are  controlled  by  their  London  head  offices. 

This  may,  if  the  present  tendency  of  amalgamation 
continues,  result  in  the  committee  of  London  clearing 
bankers  becoming  an  important  controlling  body,  but 
that  time  is  not  yet  at  hand,  and  though,  as  we  have  said, 
an  expression  of  opinion  on  the  part  of  the  committee 
carries  very  great  weight,  yet  anything  like  dictation 
would  very  properly  be  resented  by  the  important  and 
old-established  banks  in  both  London  and  the  provinces 
that  are  outside  the  Clearing  House. 

At  the  present  time  there  are  in  the  writer's  opinion 
too  many  associations  of  bankers,  so  that  their  functions 
overlap.  Besides  the  committee  of  London  clearing 
bankers  there  is  the  association  of  English  country  banks, 
which  was  reconstituted  in  1874;  the  Institute  of 
Bankers,  founded  in  1879;  and  the  Central  Association  of 
Bankers,  founded  in  1895  to  unite  the  committees  of  the 
London  Bankers'  Clearing  House,  the  West  End  banks, 
and  the  provincial  banks  of  the  United  Kingdom. 

Each  of  these  bodies  watches  over  all  matters  of  interest 
to  the  profession,  having  special  regard  to  any  legislation 

76651 — 10 19  287 


National    Monetary     C  ommis  s  io 


n 


that  may  be  brought  forward,  but  none  exercise  any 
compulsory  power  over  the  banks  as  a  whole. 

The  English  system  has  always  been  for  each  bank  to 
stand  on  its  own  merits  and  to  keep  what  reserves  it  con- 
siders necessary  for  the  nature  of  its  business,  and  on  the 
whole  this  has  worked  most  satisfactorily.  Even  in  the 
matter  of  the  publication  of  balance  sheets  no  compulsion 
is  exercised.  For  a  long  time  none  of  the  private  banks 
published  any  balance  sheet.  Gradually  they  thought  it 
better  to  do  so,  but  at  least  one  well-known  bank  has 
never  yet  done  so. 

All  the  1 8  clearing  banks  publish  half-yearly  balance 
sheets,  and  most  of  them  issue  monthly  statements  in 
addition,  showing  the  proportion  their  cash  in  hand 
and  at  the  Bank  of  England  bears  to  their  deposits;  but 
as  to  the  advisability  of  these  monthly  statements  opin- 
ions differ.  They  were  originally  issued  after  the  Baring 
crisis  on  the  advice  of  Lord  Goschen,  the  then  chancellor 
of  the  exchecquer,  but  the  stiffening  of  the  market  rates  for 
a  few  days  at  the  end  of  each  month  and  the  subsequent 
ease  at  the  commencement  of  the  next  month  is  usually 
attributed  to  the  calling  in  and  release  of  money  by  those 
banks  that  issue  monthly  statements;  and  those  banks 
that  never  have  issued  monthly  statements  urge  with 
some  truth  that  their  rivals  who  do  so  clamor  for  them 
to  come  into  line  in  this  matter  on  the  same  principle 
that  the  fox  who  lost  his  brush  declared  that  it  was  much 
more  comfortable,  and  tried  to  persuade  the  others  to  do 
so,  too. 

There  can  be  no  doubt,  however,  that  even  if  money 
does  have  to  be  called  at  the  end  of  the  month  for  window- 


The     English      Banking     System 

dressing  purposes,  it  tends  to  keep  money  liquid,  for  the 
brokers  to  whom  the  money  is  lent  have  lo  keep  this  fact 
in  mind  when  they  in  turn  lend  it  to  their  customers. 
Much,  too,  has  been  written  of  late  as  to  the  necessity  of  a 
larger  gold  reserve  in  England,  and  numerous  suggestions 
have  been  made  as  to  how  this  should  be  carried  out, 
whether  at  the  expense  of  the  Bank  of  England  or  of  the 
bankers. 

In  the  meantime  most  of  the  banks  have  been  increasing 
their  own  stocks  of  gold,  and  though  their  action  is  likely 
to  be  individual  rather  than  concerted  much  will  doubt- 
less have  been  gained  from  the  discussions,  but  it  would 
be  an  enormous  mistake  to  insist  on  any  government  com- 
pulsion in  the  matter  as  is  so  freely  discussed  in  some  quar- 
ters. 

Before  closing  this  short  history  of  the  London  Bankers 
Clearing  House  it  may  be  of  interest  to  describe  the  pro- 
cedure of  clearing  a  check.  Let  us  suppose  that  Mr.  Smith, 
who  banks  at  the  London  and  County  Bank  (head  office) , 
draws  a  check  for  £ioo  and  pays  it  to  Mr.  Jones,  who  pays 
it  into  his  account  with  his  bankers,  Messrs.  Glyn  &  Co., 
together  with  other  checks,  bank  notes,  and  cash. 

There,  after  the  necessary  entries  have  been  made  by 
the  receiving  cashier,  the  checks  are  handed  to  the  clerks, 
who  sort  them  up  under  the  heading  of  each  bank.  The 
various  parcels  of  checks  for  each  bank  are  then  entered  at 
the  bank  in  the  out-clearing  books,  and  if,  as  is  probable, 
the  number  of  them  necessitates  several  casts  being 
made  the  last  check  of  each  cast  is  turned  over  and  the 
amount  of  the  cast  written  on  it  to  facilitate  agreement 
at  the  Clearing  House. 


289 


National     Monetary     Commission 

The  checks  sorted  up  for  their  respective  banks  are 
then  taken  over  to  the  Clearing  House — which  is  an  ir- 
regular building  of  no  architectural  features  whatever, 
where  each  of  the  clearing  banks  has  seats  for  clerks  in 
accordance  with  its  requirements — and  are  there  dis- 
tributed to  the  clerks  of  the  various  banks  that  they 
happen  to  be  drawn  on.  These  in  their  turn  enter  them 
in  their  in-clearing  books,  verifying  each  cast,  as  shown 
above. 

At  the  close  of  the  clearing  each  bank  sends  down  its 
out-clearing  books  for  comparison  with  the  in-clearing 
books  of  the  other  banks  at  the  Clearing  House,  with 
which  they  should  agree  if  the  work  has  been  done  cor- 
rectly. If  the  totals  do  not  agree,  the  books  are  com- 
pared and  mistakes  rectified.  If  the  mistake  is  in  the 
cast,  the  bank  making  the  mistake  corrects  it;  if  the  fig- 
ures differ,  the  out  clearers  alter  their  figures  to  agree 
with  those  of  the  in  clearers,  and  should  it  ultimately 
prove  that  the  mistake  was  the  other  way  the  draft  is 
produced  and  the  difference  claimed.  When  the  totals 
of  out  and  in  clearing  books  are  agreed,  a  sheet  is  drawn 
up  by  the  head  clearer  of  each  bank  showing  the  balance 
due  from  or  payable  to  each  other  bank.  The  two  sides 
are  then  cast  up  and  the  balance  receivable  or  to  pay 
entered  on  a  green  ticket  if  the  former,  on  a  white  ticket 
if  the  latter. 

This  ticket,  which  is  signed  by  the  inspector  of  the 
Clearing  House,  is  an  order  to  the  Bank  of  England 
either  to  transfer  from  the  money  at  the  credit  of  the 
account  of  the  clearing  bankers  to  the  receiving  bankers' 


290 


The     English      Banking     System 

account,  or  from  the  money  at  the  credit  of  the  paying 
bankers'  account  to  the  account  of  the  clearing  bankers 
the  amount  it  bears  on  its  face.  It  will  be  obvious  that 
all  checks  can  not  pass  through  the  clearing  so  rapidly; 
some  will  be  unable  to  be  paid  for  various  reasons.  These 
have  to  be  returned  to  the  presenting  bankers  by  a  given 
time  and  are  deducted  from  the  totals.  Returned  checks 
in  the  country  clearing  have  to  be  adjusted  two  days 
later. 


291 


899  TO  1908. 


J  £  1 ,  027, 431 , 000 
jl  964.  247,  000 
I , 112. 206, 000 
999. 656. 000 
I , 025, 27s . 000 
952,  834,  000 


M 


1906. 

£1,  180,  401,  000 
I. 007, 233 , 000 
I . 078. 153 , 000 
I , 047, 828, 000 
I , 102, 264, 000 
989, 264. 000 


£1,  20s.  248,  000 
I, 026, 559, 000 
I , 103, 112, 000 
I, 092, 635, 000 
I, 069, 305, 000 
I, 002, 605, 000 


£1,  120,  786.  000 

982, 70J, 000 

I , 005. 779, 000 

1,016,  674,  000 

976,  957.000 

975.657.000 


6, 081, 649, 000 


6, 405, 143, 000 


6,  499,  464,  000 


6.078,  557,000 


J 

1,068 

885 

000 

fi. 

984 

429 

000 

s 

970 

248 

000 

c 

I,  067 

810 

000 

> 

I,  041 

854 

000 

I 

1.073 

060 

000 

1 ,  070,  134,  000 

I,  047,  697,  000 

968. 673 , 000 

I , 120, 2 13 , 000 
I , 040, 222, 000 
I , 059, 252, 000 


I,  163,  201,  000 
1,014,  087,  000 

934,  519,000 

I,  128,  810,  000 

I,  025,  139,  000 

965,  173, 000 


I,  loi,  273, 000 

907,  I  76, 000 
918, 635 . 000 

1.039.  231.  000 

991.  092,  000 

I,  084,  398,  000 


6, 206, 286, 000 


6, 306, 191, 000 


6, 230, 929, 000 


6, 041, 805, 000 


12,  207,  935,  000 


12, 711, 334, 000 


12, 730.393.000 


12,  120,  362.  000 


The     English     Banking    System 


Table  I. — Bills,  checks,  etc.,  paid  at  the  bankers'  clearing  house  in  London,  1S99  to 


HO.... 

1899. 

.900. 

.,0.. 

.90.. 

.,03. 

.904. 

.905. 

.906. 

.,07. 

.908. 

JoDuary 

764.404.000 

786.7*8,000 

784.^35,000 

£807.760.000 
790.498.000 

730.843.000 

£8e9.>19.°°° 
774.  06s,  000 
789. 306. 000 
797. -76.000 

£904.554.000 
8JJ..OO.O0O 
7S..J1J.OOO 
880.573.000 
S43.469.000 

£936,048.000 

836.690.000 

8«4.s6..ooo 
853.138.000 

£887,983.000 
843.3.0.000 

846.  ■41,000 

964.047.000 
999.656.000 
95.. 834.000 

..O7S..5J.00O 
9?9..64.ooo 

£...os..48.ooo 

..09..  635.  000 
I. 069. 30s. 000 
..00..60S.000 

£....0.786.000 
98..  704.000 

V  bniary 

h 

A    "1 

..0,6.674.000 

M 

975,657.000 

T  t  I  f  r  first  six  months 

4.669.968.000 

4.463.023,000 

4.869.159.000 

5.056.900.000 

5. 135.  666.  000  j         5.S11.936.000 

6.081.649.000 

6.40S.  .43.000 

6.499,464,000 

6.0,8.557.000 

834.938.000 
746.396.000 

787.937.000 

659.306.000 

783.314.000 
778.. 47. 000 

7JS.4j6.ooo 
69..S76.000 

.787.62S.000 

76.,S.7.ooo 

87.. 579. 000 
790.604.000 
850.547.000 

9a6.38t.ooo 

rn.'sjLoo 
846,781.000 

873.500.000 

933. 60s.  000 
964.497.000 

1.068.885.000 

984.4.9.000 

970.  .48.  000 

..067.8.0.000 

..O4..8S4.0OO 

..047.697.000 
968.673.000 

..0.4.087.000 

1    ,0      . 

907    .76  0 

Se  t      b  r 

9.8.635.000 

Oct  bn 

Novembw 

D          b 

8 

Total  for  Mcond  six  months 

4.480.301.000 

4.497.-18,000 

4.6,>.o, 0.000            4, 97. .84. .000 

4.984,  .59.000 

5. 35... 6. .000 

6,, 06., 86,  000 

6. ,06., 9. .000 

6. .,0.9.9, 000 

6  04.   8  5 

9.iso.a69,ooo 

8.960.170.000 

S6l     169   000    1          10   r,jH    tA^    000 

,0., .9.8.5,000 

.0.564.  197.  000 

■  ...S7.935.000 

..,7..,33..o.o 

...73O.J93.O0O 

■  ....o,36.,ooo 

i868. 
1869- 
1870- 
1871- 
1872- 
1873- 
1874- 
187s- 
1876- 
1877- 
1878- 
1879- 
1880. 


1883- 
1884- 
1885. 
1886. 
1887. 


Country  check 
clearing. 


£2,871,900 

2,  882,  300 
2, 868, 000 
3 , 048, 000 

3,  232,300 
3, 496, 600 
3,4SS. 400 


Fourths  of  the 
month. 


£24. 
24. 


23. 
24. 

2S. 

27. 
29. 
31. 
32. 
32. 
31. 
37. 
41. 
43. 
45. 
38, 


176, 000 
092,  200 
041 , 700 
701 , 800 
340,300 
794, 700 
634, 100 
223 , 400 
176, 900 
60s . 600 
924, 000 
038, 600 
689, 900 
096, 700 
857, 100 
106, 700 
422, 500 
734. 700 
209, 400 
055 , 600 


Consols  settling 
days. 


£29, 
29. 
26. 
24. 
25. 

25, 


33. 
33. 
36. 
40, 
47. 
49. 
49. 
S3. 
53. 
52. 
53. 


307, 000 
883, 100 
233.900 
950, 000 
039, 900 
120, 600 
787, 100 
696, 100 
217,  500 
571, 700 
586,800 
Sio, 400 
337. 200 
528, 100 
467, 000 
763.300 
231, 900 
711,  200 
657.  700 
753,800 


Stock  exchange 
settling  days. 


£S5.  78s. 

59,  022, 
44,475. 
42,  615. 
41, 777, 
40, 185. 
54.361, 
48.  452, 
46, 403, 
51.326, 
64.345. 
55.815, 
65.942, 
65.281, 
60, 699, 
64, 024, 
86,275. 
84, 649, 
75.928, 
69,687, 


000 
600 
100 
000 
600 
600 
600 
700 
400 
900 
600 
500 
700 
500 
000 
400 
900 
200 
000 
400 


The     English     Banking     System 


Table  II. — ^The  average  daily  clearings  in  london  from  1868  to  1908. 


tlioe  days,  and 
days  following 
Stock  excbange 


^toclc  rxchaase 


included  in  towo  cUarine,  . 


Propor- 
tion of 
amount 
in  each 
year  to 

1868. 
(1868= 

100.) 


100 
III 
121 
156 
183 
iSs 
193 
186 
167 
169 
168 
167 
189 
207 
206 


184 
195 
220 
247 
261 
267 
234 
223 
223 
224 
257 
282 
270 
300 
301 
32s 
359 
423 
442 
443 
475 
479 
469 
479 


Propor- 
tion of 
consols 
settling 

days 
to  total. 


Per  cent. 


On  stock-ex- 
change account 
days. 


£523. 

564. 

634, 

806. 

I.ors. 

1,038, 

I,  010, 

1,043. 

761, 

744, 

795- 

842, 

I.  151. 

1.383, 

I,  228, 

1,058, 

960, 

935. 

I.  198, 

I. 145. 

I.  252, 

1,338, 

I, 416, 

1 ,  067, 

1,022, 

1 ,  002, 

964, 

1.304, 

I,  162, 

I, 113, 

1,  231, 
1.544. 
1.339. 
1.582, 
1,566. 
1,456, 
1.536, 

2,  070. 
2.031 
1,822 
1,672 


349,  000 
935,000 
914, 000 
356,000 
959,000 
257, 000 
456, 000 
464, 000 
091 , 000 
085, 000 
443,000 
937,000 
867, 000 
430, 000 
916, 000 
703, 000 
623, 000 
084, 000 
557,000 
842, 000 
466, 000 
842, 000 
543,000 
403, 000 
764, 000 
664, 000 
455,000 
, 679, 000 
, 866,000 
, 682, 000 
, 847, 000 
, 295, 000 
,571, 000 
, 624,000 
. 755,000 
, 775,000 
, 586, 000 
,622,  000 
, 582, 000 
, 273, 000 
, 498, 000 


Propor- 
tion ot 
amount 
in  each 
year  to 

1868. 
(1868= 

100.) 


100 
108 
121 
155 
194 
198 
193 
199 
145 
142 
152 
161 
220 
264 
235 
202 
183 
179 
230 
218 
239 
256 
272 
204 
195 
191 
184 
249 
222 
212 
235 
295 
255 
302 
299 
278 
293 
395 
388 
348 
320 


Propor- 
tion of 

stock- 
exchange 
account 

days 
to  total. 


Per  cent. 


1868 
1869 
1870 
1871 
187s 
1873 
1874 
1875 
1876 
1877 
1878 
1879 
1880 


1883 
1884 
i88s 
1886 
1887 


1890 
1891 
i89» 
1893 
1894 

1895 
1896 
1897 
1898 
1899 
1900 
1901 
1902 
1903 
1904 
1 90s 
1906 
1907 
1908 


The     English     Banking    System 
Table  III. — Statistics  of  the  bankers'  clearing  bouse  from  1868  to  igoS. 


V... 

Totals  for  the 

Sot 

Ordinary  days, 
exclusive  of 

fourth!  of  the 
month,  consols 

settlinK  days. 

settling  days, 
aiid  days  follow- 

cfaanKe  setllinss. 

Propor- 
tion of 

Propor- 

"- 

Propoi- 

to™             Metropolitan 
cleariSj           '""''"■ 

tion  of 

metro.      Couutri' cheek 

politan             clearing. 

1 

Propor- 

On  fourths  of 

1868. 
(1868- 

tion  of 

On  consols        in  each 
settling  days,     year  to 

settling 
days 

days. 

§ 

days 

Vc„. 

143 
169 

.8s 
169 

.89 
i8s 

308 
3S8 

;:: 

67  5 

Pncnl.\ 

/■„„,„,' 

P„c»,, 

■  36 

146 

■  38 

165 
187 

187 

Per  real 

156 
.83 
.85 

169 

189 

189 
■98 
184 

.67 

Percent 

198 
.64 

.8s 
.56 
184 

.78 

388 
348 

16.8 

1869- 

9J6 
68s 
963 

S8s 
798 

891 
til 
Ail 
A-lB 

960 
S6i 

S6< 
J87 

396 

948 

489 
383 
398 

=38 

766 
048 
506 
S6> 

886 
853 

169 
169 
8=5 

361 

E 

418.99S 
S88.3.6 
rs6.ii9 
871.878 

890. J16 
663.65. 

336.663 
64s.  654 

86s.  469 
656. S14 

0.3.. 63 

646.339 
348.  7t4 
365.576 

00S.840 
■OS.  465 
089.571 
469.0.0 

738.  4.5 
891.138 

000 

' 



.69 

.56 
.6s 

.36 
.38 

.56 
.89 

.83 

385 
38. 

4S6 

899 
iS6 

936 
630 

348 
809 

659 
469 

681 
463 

667 

E: 

8 

163.. 30 

..5.948 

..5. 381 

=78.864 
.78.387 

.63.497 

351.690 
356.598 
314.80, 

300.478 
301.448 
345.446 

E: 

564 
634 

1.03S 

84. 

■  .383 

t.os8 
960 

1..98 
1.338 

964 

..S8. 
1.566 
1.4S6 
1.536 

356 
4S6 
08s 

916 

6>3 
084 

84. 
466 
84. 

764 

679 

847 

6.4 

s86 
58. 
498 

E: 

1869 

1871 

090  j           ,36 

653 

^ 

I87J 

1 

1   71 

1873 

::: 

■58 

67  0 

J   7a 

1874 

1 

'^ 

1875 

1 

i»7S 

'    ' 

1  gg  g 

h'b 

185 

6s  9 
6s  7 

6s  S 
6s   7 
67.8 

65    9 
68.0 

' 

*    I' 

1881 

>esa 

.B83 
1884 
188s 

1 88? 

.889 

I89I 
189a 
.893 

0        36..610 

0  1     40..  861 

1  4J8...S 
1        484.047 

i89(t.. 

1 

1901 

1 

•-"■■ 

:£9.158.553.ooo 
9.  .34.  956.  000 
9.677.988.000 

11.656,950.000 

85.8 

;£870. 189.000 
884.669.000 

93..  685.  000 
1.064.  .66.000 

fl ' 

190. 

1904 

"   " 

1904 

1905 

1 90s 

.908. 

(")          ! 

/E48....7.000     

647.84.. 000              ,    3 

] 

644.534 
631.893 

1906 

1908 

^ 


SOUTHERN  BRANCH, 
IfWIVERSITY  OF  CALIFORNU 

i4?)f  ■  .'a"TEI?T.,SB,  oalif. 


UNIVERSITY  OF  CALIFORNIA    AT   LOS   ANGELES 

THE  UNIVERSITY  LIBRARY 
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